When Will Entrepreneurs Choose to Make Themselves Replaceable? / Joshua S. Gans.

Format:

Book

Author/Creator:

Gans, Joshua S.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w34271.

NBER working paper series no. w34271

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2025.

Summary:

This paper examines when and why entrepreneurs choose to standardise their ventures and make themselves replaceable, extending Rajan's (2012) analysis within a property rights framework. A model is developed where entrepreneurs face finite pools of potential replacements and may remain with their ventures post-IPO, rather than retiring as in Rajan's setting. The analysis yields two main results. First, when worker effort is fully contractible, entrepreneurs never choose to standardise, preferring to remain irreplaceable to maximise their bargaining power. Second, when key workers exert non-contractible effort that affects firm value, standardisation becomes beneficial as it motivates worker performance while managing the entrepreneur's replaceability. The optimal level of standardisation increases with the entrepreneur's equity stake, creating a ``dead zone" where entrepreneurs retain control but will not sell to outsiders. I extend the model to allow replacement of both entrepreneurs and workers, showing that standardisation can serve to reduce the bargaining power of all participants. The findings provide testable predictions about the relationship between equity structures, replacement market depth, and organisational design choices, while highlighting the strategic trade-offs entrepreneurs face between maintaining founder-specific advantages and creating transferable value for investors.

Notes:

September 2025.

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