Managerial Delegation and Aggregate Productivity

Jan Grobovsek
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Jan Grobovsek: University of Edinburgh

No 1394, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper proposes a novel mechanism to answer why firms in low income countries are badly managed, and quantifies the resulting productivity loss. First, I present empirical evidence on a significant positive correlation between the share of managerial workers and contract enforcement across countries. Second, I construct a tractable model that captures benefits to managerial delegation in large organizations. The model also features an agency problem between the owner of a firm and its middle management. Ineffective contract enforcement, allowing middle managers to steal from the firm, constrains firm size by limiting the efficient delegation of managerial authority. Third, I use a calibrated version of the model to measure the effect of lowering contract enforcement. Compared to the benchmark of US contract enforcement, no enforcement decreases the aggregate share of managerial workers by about 10 percentage points, typical of countries with income levels of about one-tenth of the US. The associated loss in aggregate labor productivity is roughly 18 percentage points. Auxiliary statistics on the mean firm size, self-employment and productivity dispersion offer additional empirical validation of these results.

Date: 2014
New Economics Papers: this item is included in nep-bec, nep-dge and nep-eff
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1394

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