Diversity and Performance in Entrepreneurial Teams

We study the role of diversity and performance in the entrepreneurial teams. We exploit a unique dataset of MBA students who participated in a required course to propose and start a real micro-business that allows us to examine horizontal diversity (i.e., within the team) as well as vertical diversity (i.e., team to faculty advisor) and their effect on performance. The design of the course allows for identification of the causal implications of horizontal and vertical diversity. The course was run in multiple cohorts in otherwise identical formats except for the team formation mechanism used. In several cohorts, students were allowed to choose their teams from among students in their section (roughly 90 students). In other cohorts, students were randomly assigned to teams based upon a computer algorithm. In the cohorts that were allowed to choose, we find strong selection based upon shared attributes. Among the randomly-assigned teams, greater diversity along the intersection of gender and race/ethnicity significantly reduced performance. However, the negative effect of this diversity is alleviated in cohorts in which teams are endogenously formed. Finally, we find that teams with more female members perform substantially better when their faculty section leader was also female. Because the gender of the faculty section leader is exogenous to the gender make-up of the entrepreneurial team, the positive performance effects can be interpreted as causal. These findings suggest that diversity policies should take adequate consideration of the multiple dimensions of diversity.