ArticlePublisher preview available

Organizing transactions between entrepreneurs and human capital resources under Knightian uncertainty

May 2024
Small Business Economics

DOI:10.1007/s11187-024-00928-w

Authors:

Ryan Angus

University of Utah

Matthew A Barlow

University of Nebraska–Lincoln

This paper develops theory to explore when it is most efficient for entrepreneurs operating under Knightian uncertainty to contract with human capital resource providers through market governance as independent contractors or through firm governance as employees or holders of residual rights of control (i.e., co-ownership stakes in the entrepreneurial firm). We identify and develop the notion of unintentional adverse skill selection which can occur if skill requirements change as entrepreneurs experiment with the production of new resource combinations of uncertain future value. We explore the comparative efficiency of the cooperative flexibility of firm governance and the autonomous flexibility of market governance when unintentional adverse skill selection is salient. We develop a typology of human capital resources based on the breadth and depth of the skills they possess. We propose that skill breadth is positively associated with the expected efficiency of firm governance and that skill depth is positively associated with the expected efficiency of market governance. We then utilize this typology to theorize about which governance mechanisms are most efficient for transacting with four types of human capital resources: polymaths (high skill breadth, high skill depth), novices (low skill breadth, low skill depth), specialists (low skill breadth, high skill depth), and Jacks/Jills-of-all-trades (high skill breadth, low skill depth).

Human capital typology that proposes the most efficient governance choice for each quadrant under conditions of Knightian uncertainty

…

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https://doi.org/10.1007/s11187-024-00928-w

RESEARCH ARTICLE

Organizing transactions betweenentrepreneurs andhuman

capital resources underKnightian uncertainty

RyanW.Angus · MatthewA.Barlow

Accepted: 15 April 2024

Abstract This paper develops theory to explore

when it is most efficient for entrepreneurs operat-

ing under Knightian uncertainty to contract with

human capital resource providers through market

governance as independent contractors or through

firm governance as employees or holders of resid-

ual rights of control (i.e., co-ownership stakes in

the entrepreneurial firm). We identify and develop

the notion of unintentional adverse skill selec-

tion which can occur if skill requirements change

as entrepreneurs experiment with the production

of new resource combinations of uncertain future

value. We explore the comparative efficiency of

the cooperative flexibility of firm governance

and the autonomous flexibility of market govern-

ance when unintentional adverse skill selection is

salient. We develop a typology of human capital

resources based on the breadth and depth of the

skills they possess. We propose that skill breadth

is positively associated with the expected effi-

ciency of firm governance and that skill depth is

positively associated with the expected efficiency

of market governance. We then utilize this typol-

ogy to theorize about which governance mecha-

nisms are most efficient for transacting with four

types of human capital resources: polymaths (high

skill breadth, high skill depth), novices (low skill

breadth, low skill depth), specialists (low skill

breadth, high skill depth), and Jacks/Jills-of-all-

trades (high skill breadth, low skill depth).

Plain English Summary This paper helps entre-

preneurs attempting to produce novel products and

services understand the pros and cons of working

with others as independent contractors, employees,

and co-owners in a startup. This is a critically impor-

tant decision, laden with pitfalls that can harm entre-

preneurs’ chances for success. In particular, we iden-

tify the contracting hazard of unintentional adverse

skill selection which can occur if skill requirements

change as entrepreneurs pivot to experiment with dif-

ferent products and services. We develop a framework

which suggests that for (a) “polymaths” with high

skill breadth and high skill depth, the most eﬃcient

choice is co-ownership; (b) “novices” with low skill

breadth and low skill depth, the most eﬃcient choice

is employee; (c) “specialists” with low skill breadth

and high skill depth, the most eﬃcient choice is inde-

pendent contractor; and (d) “Jacks/Jills-of-all-trades”

with high skill breadth and low skill depth, the most

eﬃcient choices is employee.

R.W.Angus(*)

Department ofManagement, John Chambers College

ofBusiness andEconomics, West Virginia University,

1601 University Avenue, PO Box6025, Morgantown,

WV26506, USA

e-mail: ryan.angus@mail.wvu.edu

M.A.Barlow

Department ofManagement, College ofBusiness,

University ofNebraska-Lincoln, Lincoln, NE, USA

e-mail: matthew.barlow@unl.edu

Content courtesy of Springer Nature, terms of use apply. Rights reserved.

ResearchGate has not been able to resolve any citations for this publication.

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