This paper studies the role of diversity and performance in the entrepreneurial teams. They exploit a unique dataset of MBA students who participated in a required course to propose and start a real microbusiness that allows them 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, the research finds strong selection based upon shared attributes. Among the randomly-assigned teams, greater diversity along the intersection of gender and race/ethnicity significantly reduced performance.
Team outcomes: whether the project could proceed to IPO day, if it could yield positive cash flows in the following 5 years, relative ranking in their section and in the whole calss.
Team performance is negatively affected by higher ethnic diversity across members, with this effect being driven by the intersection of ethnicity and gender. The effect vanishes when individuals are in gender and ethnic diverse groups by choice. Reducing educational background diversity also increases team performance, while no effects are found for gender and industry diversity when assessed unidimensionally. Women perform better when they are assigned a women section leader.