New Firm Creation following Dissolution of Rival Organizations

While many scholars study why entrepreneurial entrants spur the demise of incumbents, few consider the causal effect of incumbent failure on new venture creation. I integrate insights from population ecology and evolutionary economics with individual- and firm-level logic from the organizational genealogy literature to examine the incidence of entrepreneurship by employees of existing firms following the demise of rival organizations. I theorize that competitor dissolutions may enable entrepreneurship by releasing resources that talented or under-rewarded individuals can use to create new firms. Using confidential US Census microdata from the legal services industry, I find that employees who experience the failure of a competitor are two to four times more likely than average to found a startup firm. The relationship is stronger for employees that are higher paid or working at firms that provide relatively weak pecuniary incentives. By instrumenting for the death of rival firms with the unexpected death of their upper-level managers, I establish a causal relationship between rival failure and entrepreneurial entry by employees of existing firms.