June 28, 2022
A 2017 AER paper finds that eponymous entrepreneurs seem to be more successful, ceteris paribus. The abstract states:
“We demonstrate that eponymy—firms being named after their owners—is linked to superior firm performance, but is relatively uncommon (about 19 percent of firms in our data). We propose an explanation based on eponymy creating an association between the entrepreneur and her firm that increases the reputational benefits/costs of successful/unsuccessful outcomes. We develop a corresponding signaling model, which further predicts that these effects will be stronger for entrepreneurs with rarer names. We find support for the model’s predictions using a unique panel dataset consisting of over 1.8 million firms.”
The authors’ discussion of the mechanism is illuminating:
We propose that naming the firm, specifically via eponymy, is one mechanism entrepreneurs may use to signal unique skills or high ability—an especially important consideration for new ventures. Using a signaling framework, we model eponymy as a choice that increases the reputational benefits (or costs) of successful (or unsuccessful) outcomes…
While our explanation is consistent with the data and, in our view, intuitive, it does not preclude other factors from contributing to the eponymy-performance relationship we document. Of particular interest may be the role of effort. If (as in our model) eponymy increases the stakes for success/failure, then it is natural that it should spur entrepreneurs to work harder to produce successes.
The logic is similar to Holmström (1999) and Tadelis (2002), in that the entrepreneur exerts effort in order to influence the market’s belief about her type—since her future payoffs depend on her “reputation” or perceived ability—but with the variation that a stronger association between herself and the firm increases the sensitivity of this payoff to current outcomes. A more fundamentally different explanation (which, of course, may exist) would involve a different reason for why eponymy increases the stakes for success/failure, yet still aligns with the incidence and performance patterns we document.
This paper, by itself, does not unambiguously identify a mechanism.
But what it does do is highlight reputational impacts of eponymous companies. This, in turn, may have implications for the private provision of public goods. Dan Klein documents how “esteem” was one motivation that impelled entrepreneurs to supply toll roads in California during the latter 19th century. Even when the construction of toll roads had a negative pecuniary rate of return, earning others’ esteem provided the additional necessary impetus to supply these goods.
This suggests that eponymity may play an important in facilitating other goods—besides roads—that exhibit public goods characteristics. Public goods are both non-rivalrous and non-excludable.
While it’s naive to assume government can supply the “optimal” quantity of public goods, it’s also a mistake to assume that they don’t exist. There are goods that are, indeed, harder to “fence.” The mystery is to explain how entrepreneurs overcome the obstacles inherent in supplying these goods. On this question, there is a voluminous literature.
Prohibitive costs of excluding free-riders is the same thing as saying that the pecuniary rate of return will be lower in the provision of this good, other things equal. Therefore, if the good will be supplied, at least via for-profit firms, some other motivation might come into play. One such motivation is public esteem—and having a firm named after a founder is one way to capture that esteem. (Of course, there are many other ways to private supply public goods, such as technological innovation that makes excluding free riders finally feasible. I’m ignoring those here).
One pattern prediction is that firms supplying goods with public attributes are more likely to be named after their founders than are firms supplying unambiguously private goods. Whereas founders of “private goods firms” earn a high pecuniary rate of return, founders of “public goods firms” must seek returns elsewhere—including from heightened esteem.
Exploring this empirically would be a challenge. But perhaps a place to start would be to crack open the nearest Public Finance, Public Policy, and Intermediate Micro textbooks. What do they list as “textbook examples” of public goods? And then identify private goods supplying these goods. Next, generate a list of companies supplying private goods and compare the two.
Not exactly an identification strategy, but the first step would be exploring if this pattern which I’m predicting exists at all.