DP3767 | Dynastic Management

Publication Date

23/02/2003

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Abstract

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 macroeconomic 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.