Economic Development According to Chandler

Chandler (1977) shows that large firms require hierarchies of white-collar workers to coordinate complex production. We document that this insight continues to hold globally today, and we show that low education levels in developing countries limit the supply of white-collar workers and constrain firm size. We extend the occupational choice model of Lucas (1978) to allow entrepreneurs to reorganize their firms by allocating administrative tasks to hired professionals, which brings the firm closer to constant returns to scale. We calibrate the model to be consistent with cross-sectional microdata and validate it using quasi-experimental and experimental evidence on the effects of educational expansions and management training interventions. Skills explain two-thirds of the reorganization of production into large firms with economic development, while structural transformation and reductions in barriers are needed to explain the remaining shift.