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Family first? Nepotism and corporate investment

Gianpaolo Parise and Fabrizio Leone

No 693, BIS Working Papers from Bank for International Settlements

Abstract: Nepotism emerges in a multiplicity of contexts from political assignments to firm hiring decisions, but what are its real effects on the economy? This paper explores how nepotism affects corporate investment. To measure nepotism, we build a unique dataset of family connections among individuals employed in strategic positions by the same firm. We address endogeneity concerns by exploiting the heterogeneity in ancestries across U.S. counties to construct a measure of inherited family values. We find that firms headquartered in counties where locals inherited strong family values exhibit more nepotism. Using this measure and the percentage of family households in the county as instrumental variables, we provide evidence that nepotism hinders investment. Overall, our results suggest that underinvestment in these firms is driven by both lower quality of hired workers and lower incentive to exert effort.

Keywords: nepotism; investment; moral hazard; hiring practices; family ties (search for similar items in EconPapers)
JEL-codes: G31 G40 J33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cfn
Date: 2018-01
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