Working Paper: NBER ID: w23354
Authors: Philippe Aghion; Nicholas Bloom; Brian Lucking; Raffaella Sadun; John Van Reenen
Abstract: What is the optimal form of firm organization during “bad times”? We present a model of delegation within the firm to show that the effect is ambiguous. The greater turbulence following macro shocks may benefit decentralized firms because the value of local information increases (the “localist” view). On the other hand, the need to make tough decisions may favor centralized firms (the “centralist” view). Using two large micro datasets on firm decentralization from ten OECD countries and US administrative data, we find that firms that delegated more power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis. Using direct measures of turbulence based on product churn and stock market volatility, we show that the localist mechanism dominates. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although delegation is better suited to some environments than others, countries with more decentralized firms (like the US) weathered the 2008-09 Great Recession better: these organizational differences account for about 15% of international differences in post-crisis GDP growth.
Keywords: decentralization; growth; turbulence; great recession
JEL Codes: E0; O31; O32; O33; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Delegation of authority from central headquarters to local managers (M54) | improved performance metrics in turbulent sectors (L25) |
| turbulence (E32) | improved performance metrics in turbulent sectors (L25) |
| decentralized firms (L22) | better survival rates and higher growth in sales, productivity, and profits (L25) |
| organizational structure of firms (L22) | impacts of macroeconomic shocks on firm performance (F41) |
| decentralized firms (L22) | superior resilience during the Great Recession (N12) |