Dynastic Management

The most striking difference in corporate-governance arrangements between rich andpoor countries is that the latter rely much more heavily on the dynastic family firm,where ownership and control are passed on from one generation to the other. We arguethat if the heir to the family firm has no talent for managerial decision making, dynasticmanagement is a failure of meritocracy that reduces a firm’s Total Factor Productivity.We present a simple model that studies the macreconomic causes and consequences ofdynastic management. In our model, the incidence of dynastic management depends,among other factors, on the imperfections of contractual enforcement. A plausiblecalibration suggests that, via dynastic management, poor contract enforcement maybe a substantial contributor to observed cross-country differences in aggregate TotalFactor Productivity.[...]