Working Paper: CEPR ID: DP3767
Authors: Francesco Caselli; Nicola Gennaioli
Abstract: Dynastic management is the inter-generational transmission of control over assets that is typical of family-owned firms. It is pervasive around the world, but especially in developing countries. We argue that dynastic management is a potential source of inefficiency: if the heir to the family firm has no talent for managerial decision-making, meritocracy fails. We present a simple model that studies the macroeconomic causes and consequences of this phenomenon. In our model, the incidence of dynastic management depends on the severity of asset-market imperfections, on the economy?s saving rate, and on the degree of inheritability of talent across generations. We therefore introduce novel channels through which financial-market failures and saving rates affect aggregate total factor productivity. Numerical simulations suggest that dynastic management may be a substantial contributor to observed cross-country differences in productivity.
Keywords: family firms; financial development; growth; productivity
JEL Codes: E10; E20; G10; G30; O10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial market imperfections (G19) | Higher incidence of dynastic management (P12) |
| Higher incidence of dynastic management (P12) | Lower TFP (D24) |
| Severity of asset-market imperfections (G19) | Ability of untalented heirs to transfer control (G34) |
| Ability of untalented heirs to transfer control (G34) | Capital accumulation (E22) |
| Higher saving rates (D14) | Degree of dynastic management (D73) |
| Higher saving rates (D14) | Facilitate ownership transfers (G32) |
| Intergenerational inheritability of talent (D29) | TFP (F16) |
| Dynastic management (M54) | Inefficiencies in family-owned firms (D21) |