Founding Conditions, Learning, and Organizational Life Chances: Age Dependence Revisited

• Authors: Gaël Le Mens.
• Behavioral and Experimental Economics
• Administrative Science Quarterly

Empirical evidence about the relation between organizational age and failure is mixed, and theoretical explanations are conflicting. We show that a simple model of organizational evolution can explain the main patterns of age dependence and reconcile the apparently conflicting theoretical predictions. In our framework, the predicted pattern of age dependence depends crucially on the quality of organizational performance immediately after founding and its subsequent evolution, which in turn depends on the intensity of competition. In developing our theory, we clarify issues of levels of analysis as well as the relations between organizational fitness, endowment, organizational capital, and the hazard of failure. We show that once organizational learning is considered, founding conditions affect the fate of organizations in ways more complex than previously acknowledged. We illustrate how the predictions of our theory can be tested empirically and evaluate the effect of aging on the mortality hazards of American microbreweries and brewpubs by estimating the parameters of a random walk with time-varying drift. We also make some conjectures about expected patterns in other empirical settings.