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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

  • Ufuk Akcigit
  • Harun Alp
  • Michael Peters
American Economic Review
vol. 111, no. 1, January 2021
(pp. 231–75)
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Abstract

Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms' willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the United States and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11 percent of the income per capita difference between the United States and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for US firms. The reason is that US firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements.

Citation

Akcigit, Ufuk, Harun Alp, and Michael Peters. 2021. "Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries." American Economic Review, 111 (1): 231–75. DOI: 10.1257/aer.20180555

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • L25 Firm Performance: Size, Diversification, and Scope
  • L26 Entrepreneurship
  • O14 Industrialization; Manufacturing and Service Industries; Choice of Technology