All in the family? CEO choice and firm organization [project website]
with R. Lemos
Covered on: World Bank’s Development Impact blog, The Economist, LSE Business Review, VoxDev
Awarded Accessit Best Paper at IOEA 2018.
Family firms are the most prevalent firm type in the world, particularly in emerging economies. Dynastic family firms tend to have lower productivity, though what explains their underperformance is still an open question. We collect new data on CEO successions for over 800 firms in Latin America and Europe to document their corporate governance choices and, crucially, provide causal evidence on the effect of dynastic CEO successions on the adoption of managerial best practices tied to improved productivity. Specifically, we establish two key results. First, there is a preference for male heirs: when the founding CEO steps down they are 30pp more likely to keep control within the family when they have a son. Second, instrumenting with the gender of the founder’s children, we estimate dynastic CEO successions lead to 0.8 standard deviations lower adoption of managerial best practices, suggesting an implied productivity decrease of 5 to 10%. To guide our discussion on mechanisms, we build a model with two types of CEOs (family and professional) who decide whether to invest in better management practices. Family CEOs cannot credibly commit to firing employees without incurring reputation costs. This induces lower worker effort and reduces the returns to investing in better management. We find empirical evidence that, controlling for lower skill levels of managers, reputational costs constrain investment in better management.
Compensation practices, worker mobility, and wage dispersion: evidence from Brazilian employer-employee matched data [slides]
with C. Cornwell and I. Schmutte
Recent research has documented growing wage disparities in between-firm wages. One possible reason is that the heterogeneous application of modern management practices has led to increasing firm-specific productivity differences and induced greater worker sorting. We use matched employer-employee data from Brazil linked to the manufacturing firms covered in the World Management Survey (WMS) to characterize different personnel management profiles firms use to affect recruiting, motivation, and retention of high-quality workers. We show that the heterogeneity in pay across firms has two key components that have been conflated in prior work: a level component and a tenure component, both of which can vary across occupations, and drift over time. Because they are associated with management practices aimed at recruiting and retaining talented workers, they also help explain observed increases in sorting between high-wage workers and high-wage firms.
School management and productivity in the public sector: evidence from India [slides] (coming soon)
with R. Lemos and K. Muralidharan
This paper uses two new datasets from India to study management and productivity in public and private schools. We report four main sets of results. First, we conduct a systematic measurement of management practices in public and private primary schools and find substantially higher management scores in private schools. These gains are mainly driven by differences in people management as opposed to operations management. Second, we find that the private school advantage over public schools in student value-added is largely accounted for by differences in management practices. Third, we find that the private school advantage in measures of people management is consistent with independent measures of personnel policy. Specifically, private school teacher pay is positively correlated with measures of teacher value-added, and private schools are more likely to retain teachers with higher value-addition and let go teachers with lower value-addition. Neither pattern is seen in public schools. Finally, measures of school-management quality are more correlated with measures of effective teacher practice in public schools than in private schools. These results suggest that once a school can optimize their selection and retention practices – that is, get their personnel policy right – continuous oversight of what happens in the classroom is less important. When this channel is shut down (as is the case in public schools), school management may be more important.
Where the money goes: school management and resource allocation in Brazil
with D. Clarke and T. Teodorovicz
Teachers account for one of the largest chunks of expenditures of public school systems, and teachers are also one of the key inputs into the education production function. Public school systems are often constrained in wage-setting and cannot actively implement incentive-pay schemes. So what works in improving teacher performance in public schools? We explore a change in the funding formula for public schools in Brazil that mandates an exogenously set share of resources that must be used in the teacher wage bill of school systems. This change affected Brazil’s municipalities differently as some received different amounts of funds, and chose to spend their funds in different ways. In this paper, we first provide a long-term look at 20 years of data and document how teacher salaries, number of teachers employed and student-teacher ratios have changed over time in Brazilian municipalities. Secondly, we employ an event study to document how different municipalities responded to the funding change and explore the characteristics that may help explain the heterogeneity in resource usage as well as student outcomes. We propose that management practices across different school systems explains part of the superior/inferior ability of school systems to effectively use and distribute the increase in resources they experienced after the funding formula change.