Working Paper: NBER ID: w21905
Authors: Ufuk Akcigit; Harun Alp; Michael Peters
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.
Keywords: Managerial Delegation; Firm Growth; Developing Countries; Productivity; Income Differences
JEL Codes: O31; O38; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low efficiency of managerial delegation in India (D73) | productivity differences (O49) |
| low efficiency of managerial delegation in India (D73) | income differences (D31) |
| increase in delegation efficiency to US standards (H77) | average firm size in India (L25) |
| increase in delegation efficiency to US standards (H77) | employment share of small firms in India (L25) |
| US firms subjected to India’s lower delegation efficiency (F69) | negative impacts on firm expansion (F69) |
| managerial consulting (M54) | output increases (E23) |