Choosing Ties from the Inside of a Prism: Egocentric Uncertainty and Status in Venture Capital Markets

Abstract

This chapter draws an analytical distinction between altercentric and egocentric uncertainty. Altercentric uncertainty refers to the uncertainty that buyers face about the product quality of a focal producer (ego). Egocentric uncertainty refers to the uncertainty that the producer itself faces about the resource allocation decisions that will result in a product that is regarded as high quality by buyers. This chapter then argues that the value that a firm derives from its own status is positively related to altercentric uncertainty and negatively related to egocentric uncertainty. That is, status is valuable when buyers can use it as a signal of quality, but status is not valuable when a producer does not know how to’ spend’ its status to produce quality. As a consequence, high status producers should seek out markets or market segments where egocentric uncertainty is low. This argument and hypothesis are tested in an examination of the venture capital markets.