Leo Iacovone examines relationship of productivity, contracting environments and management.
In a new working paper for the World Bank, “Family Firms and Contractual Institutions”, Professor of Economics Leo Iacovone shows how different contracting environments affect whether family-owned firms choose to be family-managed or to contract with outside professionals for management. This choice affects the firms’ productivity and consequently also the overall productivity of different regions and countries.
Using a database on management and ownership of companies in 134 regions and 11 European countries, the study co-authored by William F. Maloney and Nick Tsivanidis finds that smaller firms and those in regions with worse contracting environments are more likely to be family managed. These are also 25 percent less productive than professionally managed firms, the study shows. And the authors stress that this result is driven by the family (non-professional) management rather than by the family ownership structure, i.e. family-owned firms that are professionally managed do not suffer from this productivity penalty.
Finally, the authors conclude that, “Moving from the country with the least reliable contracting environment to the most reliable can increase total factor productivity by 21.6%.”