00-070
(WHY) ARE NETWORKS IMPORTANT?
Bharat N. Anand and Mikolaj Jan Piskorski
Existing research has documented that network positions of economic
actors influence the structure of interaction between them. However, it is
still unresolved whether advantage in future transactions arises from
occupation of a network position per se or from underlying, but unobserved,
firm characteristics which network positions proxy for. Understanding the answer to
this question has important consequences for network entry, dynamics as well as
normative implications. To answer these questions, we study the network of
venture capitalists in the U.S. over the period 1984-1998. The syndicated
nature of VC investments, the panel nature of the dataset, and the ability to
construct measures of both a venture capitalist’s network attributes as well as
its resource endowments allow us to examine these issues in detail. We find
that network characteristics--including past ties, common alters, and venture
capitalist centrality--are important determinants of the likelihood of
affiliation between any pair of venture capitalists, and confirm the role of
network positions as solutions to information and incentive problems that might
otherwise plague syndicates. However, the importance of the network variables
declines--but does not disappear--once we include measures of the monetary
endowments of the partners, implying that these characteristics do proxy for
unobserved attributes. Interestingly, we find that the intangible assets of
VCs (eg., its network position) are on average as important as their tangible
assets (eg., available funds) in determining their likelihood of affiliation
with others.
Keywords: venture capital, network dynamics, unobserved heterogeneity.
C&S
34 pages
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