The private governance of entrepreneurship: an institutional approach to entrepreneurial discovery

This thesis develops and applies an institutional governance approach to the economic problem of entrepreneurial discovery of market opportunities. In doing so it expands understanding of one of the fundamental drivers of economic growth, innovation, and contributes both to institutional economics and entrepreneurial theory. This thesis applies the analytical approaches and theories of institutional mainline economics—including transaction cost economics, entrepreneurial theory, common pool resource management and new comparative political economy—to analyse the governance choices of entrepreneurs in the earliest stages of entrepreneurial discovery. Early stage entrepreneurs face an economic problem of coordinating non-price information about future market opportunities with others, under uncertainty, with non-zero transaction costs. This new contract-theoretic approach to the innovation problem does not emphasise a market failure of a misallocation of investment to innovation activities, but rather emphasises the entrepreneurial problem of the governance of knowledge under uncertainty to discover actionable market opportunities. The main proposition is that it may be transaction cost economising for an early stage entrepreneur to privately self-govern opportunity discovery in polycentric hybrids called innovation commons. This theoretical development is applied to the cases of hackerspaces and the hybrid organisations coalescing around blockchain technology. The role of innovation commons also has implications for the political economy of the institutions of innovation policy. As such, this dissertation has three structural parts—theoretical development, application and political economy—that converge on the theme of the private collective action governance of entrepreneurial discovery.

The first part of the thesis theoretically develops a transaction cost economics approach to entrepreneurial discovery of market opportunities. The first contribution is to shift the conventional choice-theoretic market failure analysis of the innovation problem—which focuses on allocation and investment of innovation resources—to a contract-theoretic analysis, which focuses on the entrepreneur and the transaction costs they face. In the earliest stages of entrepreneurial discovery the primary economic problem facing the entrepreneur is coordinating distributed, uncertain and non-price information to reveal actionable market opportunities. Given the information proto-entrepreneurs require to solve their economic problem is distributed about the economy in the minds of others, and that coordinating this information faces non-zero transaction costs, the proto-entrepreneurial innovation problem is primarily a comparative institutional governance problem. Given that the structure of transaction costs shifts throughout an innovation trajectory—as the economic problem moves from one of discovering opportunities to exploiting those opportunities—so too may the economising governance structure. As proto-entrepreneurs begin to solve their economic problems and market opportunities become clearer, their level of structural uncertainty falls and the potential for opportunism over quasi-rents increases—that is, there is an entrepreneurial fundamental transformation.

The second contribution is to introduce and define a potential transaction cost economising governance solution to these earliest stages of the proto-entrepreneurial problem. The innovation commons are introduced as polycentric collective action governance structures where proto-entrepreneurs coordinate distributed and uncertain information to whittle away uncertainty over potential market opportunities. The theoretical characteristics of these innovation commons are predicted to be transaction cost economising in the beginning of new industries and technologies, where structural entrepreneurial uncertainty is highest. This new type of innovation commons is compared to existing physical and knowledge commons, revealing several unique institutional behavioural characteristics. Innovation commons are predicted to only be transaction cost economising for a temporary period of time because they process uncertainty and in doing so their success may instigate their decline into other institutions of firms and markets. Further, an innovation commons is not an economy-wide phenomenon, but is rather likely to emerge around new technologies and industries, where there are potential gains from trade of non-price coordination with other proto-entrepreneurs.

The second part of the thesis applies this theory to the private governance of entrepreneurial resources, demonstrating that proto-entrepreneurs are privately governing early stage entrepreneurial resources under collectively developed governance structures—in both hackerspaces and around blockchain technology. An analysis of secondary data of the governance of hackerspaces reveals micro-institutional mechanisms including graduated social ostracism, costly signalling to facilitate ordering, reputation-based coordination, and nested hierarchies of rules. The analysis also reveals that hackers are at least temporarily choosing to secede from other institutions of innovation, including innovation policy, to solve their economic problem through private governance rules. The second application is to the nascent but potentially general technology, blockchain, revealing collaborative private governance structures including hack-a-thons, embassies and conferences. A higher order institutional explanation for the emergence of blockchain innovation commons is also proposed. The process of crypto-secession creates a new decentralised society called the crypto-economy, which, when seen from the perspective of new development economics, the core problem facing blockchain proto-entrepreneurs is to coordinate non-price information about the institutional complementarities of blockchains to develop ‘protective-tier’ institutions. Because there is no sovereign state, the development process for the crypto-economy must be privately governed by entrepreneurs, and providing a higher order explanation of blockchain innovation commons as examples of private economic development.

The third part of the thesis develops a subjective political economy framework, and then applies the framework to understand the political economy of the institutions of innovation. The institutional possibility frontier (IPF) framework is extended to incorporate the notion of Austrian subjective costs into institutional choice. Subjectively perceived institutional costs imply that each individual subjectively perceives their own space of cost minimising institutions. This subjective political economy framework demonstrates the choice by the proto-entrepreneur to govern their economic problem within polycentric innovation commons. The institutional choice to enter the polycentric innovation commons reveals a perception of the transaction cost minimising point with the IPF space. This understanding also has implications for the scope and application of the institutions of innovation and innovation policy. Privately governed innovation commons suggest a subjective systematic overweighting of the costs of disorder in the study of the institutions of innovation. Innovation policies must themselves be understood as the product of a discovery process over subjective costs, framed through the ideas and rhetoric.