Working Paper: CEPR ID: DP13513
Authors: Wouter Dessein; Andrea Prat
Abstract: We argue that economists have studied the role of management from three perspectives: contingency theory (CT), an organization-centric empirical approach (OC), and a leader-centric empirical approach (LC). To reconcile these three perspectives, we augment a standard dynamic firm model with organizational capital, an intangible, slow-moving, productive asset that can only be produced with the direct input of the firm's leadership and that is subject to an agency problem. We characterize the steady state of an economy with imperfect governance, and show that it rationalizes key findings of CT, OC, and LC, as well as generating a number of new predictions on performance, management practices, CEO behavior, CEO compensation, and governance.
Keywords: CEO; Management; Organizational Capital
JEL Codes: L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality of corporate governance (G38) | CEO behavior (M12) |
| CEO behavior (M12) | Firm performance (L25) |
| Quality of corporate governance (G38) | Firm performance (L25) |
| CEO leadership style (M12) | Management practices (M54) |
| Management practices (M54) | Firm performance (L25) |
| CEO tenure and behavior type (M12) | Organizational capital (D29) |
| Positive shocks from high-quality CEOs (G34) | Long-term performance improvements (D29) |
| Poor leadership (Y70) | Persistent negative effects on performance (D29) |