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

Ufuk Akcigit, Harun Alp, Michael Peters

NBER Working Paper No. 21905
Issued in January 2016
NBER Program(s):Development Economics, Economic Fluctuations and Growth, Industrial Organization, Productivity, Innovation, and Entrepreneurship

Firm dynamics in poor countries show striking differences to those of rich countries. While few firms indeed experience growth as they age, most firms are simply stagnant in that they neither exit nor expand. We interpret this fact as a lack of selection, whereby producers with little growth potential survive because innovative entrepreneurs do not expand enough to force them out of the market. To explain these differences, we develop a theory whereby firms require managerial inputs for production and countries differ in their managerial delegation possibilities. If delegation of managerial tasks to outside managers is difficult in poor countries, entrepreneurs are forced to rely on their own time to supply managerial services. Improvements in the efficiency of delegation will raise the returns to growing large, induce innovative firms to expand, and thereby force stagnant entrepreneurs out of the market. We prove the existence and uniqueness of the dynamic equilibrium and show analytically how the degree of selection depends on some of the key structural parameters. To discipline the quantitative importance of this mechanism, we calibrate our model to micro data from the US and India. Differences in the efficiency of managerial delegation can explain an important fraction of the differences in plants' life-cycles.

download in pdf format
   (975 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21905

Users who downloaded this paper also downloaded* these:
Autor, Dorn, and Hanson w21906 The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade
Brown, Earle, and Morgulis w21733 Job Creation, Small vs. Large vs. Young, and the SBA
Pakes w21999 Methodological Issues in Analyzing Market Dynamics
Hsieh and Klenow w18133 The Life Cycle of Plants in India and Mexico
Acemoglu, Akcigit, Alp, Bloom, and Kerr w18993 Innovation, Reallocation and Growth
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us