Dynastic Management

Francesco Caselli, Nicola Gennaioli

NBER Working Paper No. 9442
Issued in January 2003
NBER Program(s):   AP   EFG

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.

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Published: Caselli, Francesco and Nicola Gennaioli. "Dynastic Management." Journal of the European Economic Association 3, 2-3 (April/May 2005): 679-689.

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This paper was revised on February 8, 2006

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