1. Entrepreneurial Action, Unique Assets,
and Appropriation Risk: Firms as a Means
of Appropriating Profit from Capability
Creation
1. Aseem Kaul (akaul@umn.edu)
+Author Affiliations
1. Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455
Abstract
This paper examines organizational boundary choice from an entrepreneurial perspective. Entrepreneurs create new
profit opportunities by recombining existing assets into novel combinations based on their subjective judgment
under conditions of uncertainty. In doing so, they become vulnerable to ex post appropriation by owners of uniquely
complementary assets, especially where ex ante uncertainty translates into ex post causal ambiguity. Firms are a
means by which entrepreneurs overcome this problem, maximizing the appropriation of pure profits from their
actions. The paper formalizes this insight in an integrative model of entrepreneurial governance choice, highlighting
the trade-off between the risk of appropriation and the incremental cost of asset ownership. Comparative statics from
this model provide predictions about the conditions under which hierarchical governance will be preferred. In
particular, they suggest that firms are preferred where entrepreneurial action results in the creation of combinations
of assets that are rare, valuable, and difficult to imitate (i.e., the creation of strategic capabilities). The paper thus
contributes to work on the dynamics of capabilities and transaction costs, highlighting the structurally uncertain
nature of capability creation and its implications for the theory of the firm.
Key Words:
organizational economics
organizational capabilities
theory of the firm
entrepreneurship
innovation
transaction cost