Productivity and credibility in industry equilibrium

Powell, M. J. D.

doi:10.1111/1756-2171.12264

Cited by 11 publications

(10 citation statements)

References 85 publications

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“…We focus on inefficiencies in the interaction between managers and owners of firms to explain the differences in firms' demand for expansion. Hence, particularly relevant contributions are Caselli and Gennaioli (2012) and Powell (2012). Caselli and Gennaioli (2012) also stress the negative consequences of inefficient management.…”

Section: Related Literaturementioning

confidence: 99%

“…In contrast, we argue that managerial frictions within the firm reduce growth incentives and hence prevent competition from taking place sufficiently quickly on product markets. Such within-firm considerations are also central in Powell (2012), who studies an economy where firms ("owners") need to hire managers as inputs to production but contractual frictions prevent owners from committing to pay the promised managerial compensation after managerial effort has been exerted. He studies the properties of the optimal long-term relational contract in a stationary equilibrium, whereby owners are disciplined to keep their promises through reputational concerns.…”

Section: Related Literaturementioning

confidence: 99%

“…There are two important differences from our paper. First, Powell (2012) studies an economy where firm productivity is constant, i.e., there is no interaction between contractual frictions in the market for managers and firms' innovation incentives. Second, while he studies the implications of owners not being able to write contracts on their wage promises, we focus on managers not being able to contractually commit themselves to their choice of effort.…”

Section: Related Literaturementioning

confidence: 99%

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Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Akcigit

Alp

Peters

2021

American Economic Review

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Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms’ willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the United States and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11 percent of the income per capita difference between the United States and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for US firms. The reason is that US firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements. (JEL D22, G32, L25, L26, O14)

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Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

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Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Akcigit

Alp

Peters

2021

American Economic Review

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“…36. Powell (2012) builds the intuition that the inability of owners in developing countries to trust nonfamily managers limits firm size into a contracting model and shows this explains a wide number of firm and macro facts.…”

Section: Vib How Do Badly Managed Firms Survive?mentioning

confidence: 81%

Do Management Interventions Last? Evidence from India

Bloom

Mahajan

McKenzie³

et al. 2018

AEA Randomized Controlled Trials

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A long-standing question is whether differences in management practices across firms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. To investigate this, we ran a management field experiment on large Indian textile firms. We provided free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. We find that adopting these management practices raised productivity by 17% in the first year through improved quality and efficiency and reduced inventory, and within three years led to the opening of more production plants. Why had the firms not adopted these profitable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of

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“…In the aspect of incentive provision, related to the current article is Benabou and Tirole (), which embeds a multi‐tasking moral hazard model into a Hotelling‐like framework to analyse the impact of market competition and skill‐biased technical change on the structure of compensation. Another related research is Powell (), which incorporates relational contracts into a model with heterogeneous firms to study the provision of managerial incentives and firm productivity.…”

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confidence: 99%

Incentive Contracts and the Allocation of Talent

2017

The Economic Journal

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This paper develops a theory of sorting that links ability, pay-performance sensitivity, and pay levels. Firms employ managers to improve productivity. Because of limited liability, …rms use incentive contracts to elicit managerial e¤ort; the type of optimal contract depends on a manager's ability. In equilibrium, individuals are sorted based on ability into production workers, business owners, managers paid an ability-invariant bonus, and managers whose pay varies with ability and …rm size. The model generates predictions regarding the e¤ects of technological progress and product competition on the distributions of wages, pay structure, and employment across a wide range of managerial levels.Economists have long been interested in the relationship between individual ability and pay-performance sensitivity. Lazear (1986)'s well-known theory posits that high-ability workers sort into jobs with performance pay while low-ability workers take jobs with …xed wages.A related strand of literature argues that CEOs earn high levels of compensation primarily

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Productivity and credibility in industry equilibrium

Cited by 11 publications

References 85 publications

Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries

Do Management Interventions Last? Evidence from India

Incentive Contracts and the Allocation of Talent

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