Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries
Managerial delegation is essential for firm growth. While firms in poor countries often shun outside managers and instead recruit among family members, the pattern is quite the opposite for firms in rich countries. In this paper, we ask whether these differences in managerial delegation have important aggregate effects. We construct a model of firm growth where entrepreneurs have fixed-time endowments to run their daily operations. As firms grow larger, the need to delegate decision-making authority increases. Firms in poor countries might therefore decide to remain small if delegating managerial tasks is difficult. We calibrate the model to firm-level data from the U.S. and India. We show that the model is quantitatively consistent with the experimental micro evidence on managerial efficiency and firm growth reported in Bloom et al. (2013). Our quantitative analysis shows that the low efficiency of delegation in India can account for 5% of productivity and 15% of income differences between the U.S. and India in steady state. We also show that such inefficient delegation possibilities reduce the size of Indian firms, but would cause substantially more harm for U.S. firms. This is because there are important complementarities between the ease of delegation and other factors affecting firm growth.
This is a heavily revised version of Akcigit, Alp, and Peters (2016). We thank the seminar and conference participants at Harvard, MIT, University of Chicago, Stanford, Princeton, Yale, USC, LSE, the Productivity, Development & Entrepreneurship, and Macroeconomics Within and Across Borders Meetings at the NBER Summer Institute, the NBER Development Program and EFG Meeting, Stanford CID/IGC Conference, AEA Meetings, OECD/NBER Conference on Productivity and Innovation, Minnesota Macro, NYU, Penn State, Einaudi, University of Houston, Barcelona GSE Summer Forum, Kauffman Entrepreneurship Conference, London Macroeconomics Conference, CAED 2015 Conference, Cologne Workshop on Macroeconomics, SKEMA Growth Conference, UPenn Growth Reading Group, and UPenn Macro Lunch for helpful comments. In particular we would like to thank our discussants Francesco Caselli, John Haltiwanger, Chang-Tai Hsieh, Rasmus Lentz, and Yongs Shin. We furthermore received very valuable feedback from Abhijit Banerjee, Nick Bloom, Matthew Cook, Jeremy Greenwood, Bill Kerr, Pete Klenow, Chad Jones, Sam Kortum, Robert E. Lucas, Giuseppe Moscarini, Luis Serven, Andrei Shleifer, and Nancy Stokey. Chang-Tai Hsieh and Pete Klenow have kindly shared some of their data with us. Jeremy Pearce provided excellent research assistance. Akcigit gratefully acknowledges financial support from the World Bank, the Alfred P. Sloan Foundation, the Ewing Marion Kauffman Foundation, and the National Science Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Ufuk Akcigit & Harun Alp & Michael Peters, 2021. "Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries," American Economic Review, American Economic Association, vol. 111(1), pages 231-275, January. citation courtesy of