We study the role of diversity on the performance of entrepreneurial teams by exploiting a unique experimental setting of over 3,000 MBA students who participated in a business course to build startups. First, we quantify the strong selection based upon shared attributes when students are allowed to choose teammates. Team formation based upon shared endowed demographic characteristics such as gender, race, and ethnicity is stronger than team formation based upon acquired characteristics such as education and industry background. Second, when team memberships are randomly assigned, greater racial/ethnic diversity leads to significantly worse performance. Interestingly, the negative performance effect of diversity is partially alleviated in cohorts where teams are formed voluntarily. Finally, we find that teams with more female member performed substantially better when their faculty section leader was female. These findings suggest
that policy interventions targeting greater diversity should consider match-specific qualities in forming teams to prevent the potential negative impact of diversity and aim to reduce existing biases against certain groups. Our results on vertical diversity suggest that capital allocators could also play
an important role in the mentoring and advising of minority entrepreneurs.
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