Working Paper: NBER ID: w16658
Authors: Nicholas Bloom; Benn Eifert; Aprajit Mahajan; David McKenzie; John Roberts
Abstract: A long-standing question in social science is to what extent differences in management cause differences in firm performance. To investigate this we ran a management field experiment on large Indian textile firms. We provided free consulting on modern management practices to a randomly chosen set of treatment plants and compared their performance to the control plants. We find that adopting these management practices had three main effects. First, it raised average productivity by 11% through improved quality and efficiency and reduced inventory. Second, it increased decentralization of decision making, as better information flow enabled owners to delegate more decisions to middle managers. Third, it increased the use of computers, necessitated by the data collection and analysis involved in modern management. Since these practices were profitable this raises the question of why firms had not adopted these before. Our results suggest that informational barriers were a primary factor in explaining this lack of adoption. Modern management is a technology that diffuses slowly between firms, with many Indian firms initially unaware of its existence or impact. Since competition was limited by constraints on firm entry and growth, badly managed firms were not rapidly driven from the market.
Keywords: management practices; productivity; field experiment; India; textile firms
JEL Codes: L2; M2; O14; O32; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in average productivity (O49) | improved quality and efficiency (L15) |
| increase in average productivity (O49) | reduced inventory (G31) |
| introduction of management practices (L23) | improved information flow (D83) |
| improved information flow (D83) | better decision-making (D91) |
| improved information flow (D83) | delegation of authority to middle managers (M54) |
| increased decentralization of decision-making (H77) | delegation of more decisions to plant managers (L23) |
| use of computers (C89) | increased due to data collection and analysis requirements of modern management practices (C80) |
| informational barriers (L86) | constraint on adoption of management practices (D22) |
| adoption of modern management practices (L23) | increase in average productivity (O49) |
| intervention (D74) | increased decentralization of decision-making (H77) |