The Paradox of Resource Provision in Entrepreneurial Teams: Between Self-Interest and the Collective Enterprise

Abstract

Viewing entrepreneurship as a form of collective action, this paper investigates the tension between an entrepreneurial team’s reliance on collective efforts for achieving success and individual members’ tendencies to withhold their personal resources. We argue that the precarious nature of the early founding stage and the difficulty of redeploying some resources for other uses amplify the risk of early-stage resource contributions and may lead to team members withholding resources or even free riding. Two conditions may help overcome such collective action problems: adopting a formal contract to specify rewards and sanctions and encouraging reciprocal exchange among team members through the lead entrepreneur’s voluntary contributions. Analyzing a nationally representative multiwave panel study of entrepreneurial teams in the United States, we show that early-stage team members are reluctant to provide resources tailored to the business, even though such resources are critical to venture survival. We find that presigned formal contracts and founding entrepreneurs’ initial contributions make members’ contributions of such resources much more likely. Lead entrepreneurs’ voluntary contributions to their businesses, signified by their provision of resources that impose high risks on themselves but increase the viability of the business, help mitigate collective action problems within entrepreneurial teams.