Is failure good?

Abstract

Approximately 80–90 percent of new firms ultimately fail. The tendency is to think of this failure as wasteful. We, however, examine whether there are economic benefits to offset the waste. We characterize three potential mechanisms through which excess entry affects market structure, firm behavior, and efficiency, then test them in the banking industry. Results indicate that failed firms generate externalities that significantly and substantially reduce industry cost. On average these benefits exceed the private costs of the entrants. Thus failure appears to be good for the economy. Copyright © 2005 John Wiley & Sons, Ltd.

The effect of size on the failure probabilities of SMEs: An empirical study on the US market using discrete hazard model

“…In addition, according to Knott and Posen (2005), not all business failures are due to financial difficulties. Starting from this argument, one should take into consideration before analysing and studying business failure rates that it is essential to separate between firm failure and firm planned exit strategies where the business is actually healthy enough to continue operation (Headd (2003);and Bates (2005)).…”

Inside opportunity formation: enterprise failure, cognition, and the creation of opportunities

“…It has been investigated in one form or another at multiple levels of analysis: in the economy (Shane, 1996), in organizational populations (Hannan and Freeman, 1989), in fi rms (Holmberg and Morgan, 2003), and in individuals (Zacharakis, Meyer, and DeCastro, 1999). Failure has been portrayed both positively (Knott and Posen, 2005) and negatively (e.g., Dickinson, 1981), and has been linked to concepts such as entrepreneurial grief (Shepherd, 2003), learning (Minniti and Bygrave, 2001;Sitkin, 1992), and risk and reward (McGrath, 1999), as well as numerous other socioeconomic phenomena (e.g., Begley and Tan, 2001). Interestingly, we see that where willingness to recognize failure has been found to have cathartic effects (Loewenthal et al, 2002;Mahmud, 2002), these effects might be somewhat similar to the learning necessary to reduce bias in a mindset through better cognitive calibration (e.g., Kruger and Dunning, 1999), enabling a more realistic pursuit of opportunity creation.…”

No Exit: Failure to Exit Under Uncertainty

“…The cost variable is the measure of firm cost relative to a global frontier derived in Knott and Posen (2005). The demand variable follows convention in the banking literature and thus is captured as loans ($1000).…”