Working Paper: NBER ID: w9442
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 macreconomic 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: No keywords provided
JEL Codes: N01; E2; G1; G3; O1; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynastic management (D73) | inefficiencies in family-owned firms (D21) |
| heritability of talent (D29) | impact of dynastic management on TFP (D24) |
| saving rates (E43) | TFP (F16) |
| dynastic management (D73) | TFP (F16) |
| poor contract enforcement (D86) | dynastic management (D73) |
| poor contract enforcement (D86) | underdeveloped financial markets (O16) |
| underdeveloped financial markets (O16) | untalented heirs transfer control (Y70) |
| poor legal institutions (P37) | cross-country differences in TFP (O57) |