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Title: Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Citation Type: Working Paper

Publication Year: 2016

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Abstract: Managerial delegation is essential for firm growth. While firms in poor countries often shun outside managers and instead recruit among family members, the pattern is quite the opposite for firms in rich countries. In this paper, we ask whether these differences in managerial delegation have important aggregate effects. We construct a model of firm growth where entrepreneurs have fixed-time endowments to run their daily operations. As firms grow larger, the need to delegate decision-making authority increases. Firms in poor countries might therefore decide to remain small if delegating managerial tasks is difficult. We calibrate the model to firm-level data from the U.S. and India. We show that the model is quantitatively consistent with the experimental micro evidence on managerial efficiency and firm growth reported in Bloom et al. (2013). Our quantitative analysis shows that the low efficiency of delegation in India can account for 5% of productivity and 15% of income differences between the U.S. and India in steady state. We also show that such inefficient delegation possibilities reduce the size of Indian firms, but would cause substantially more harm for U.S. firms. This is because there are important complementarities between the ease of delegation and other factors affecting firm growth.

Url: http://www.nber.org/papers/w21905

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Authors: Akcigit, Ufuk; Alp, Harun; Peters, Michael

Series Title: NBER Working Paper Series

Publication Number: 21905

Institution: National Bureau of Economic Research

Pages: 52

Publisher Location: Cambridge, MA

Data Collections: IPUMS International

Topics: Labor Force and Occupational Structure, Other

Countries: India, United States