TDPE presents: Ufuk Akcigit

Ufuk Akcigit, University of Pennsylvania 

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

Firm dynamics in poor countries show striking differences to those of rich countries. While some firms indeed experience growth as they age, many firms are simply stagnant in that they neither exit nor expand. We interpret this fact as a lack of selection, whereby producers with little growth potential survive because innovating firms do not expand enough to force them out of the market. To explain these differences we develop a theory, whereby contractual frictions limit firms’ acquisition of managerial time. If managerial effort provision is non-contractible, entrepreneurs will benefit little from delegating decision power to outside managers, as they spend most of their time monitoring their managerial personnel. As the return to managerial time is higher in big firms, improvements in the degree of contract enforcement will raise the returns of growing large and thereby increase the degree of creative destruction. To discipline the quantitative importance of this mechanism, we incorporate such incomplete managerial contracts into an endogenous growth model and calibrate it to firm level data from India. Improvements in the efficacy of managerial delegation can explain a sizable fraction of the difference between plants’ life-cycle in the US and India.

Ufuk Akcigit is an Assistant Professor of Economics at the University of Pennsylvania. He is also a Faculty Research Fellow at the National Bureau of Economic Research. He received his PhD from MIT and has been at Penn since 2009. His research interests are in macroeconomics, economic growth, technological change, productivity, firm dynamics, and economics of innovation. He is one of the winners of the 2014 Kauffman Junior Faculty Fellowship.

Sponsored by Trade Development and Political Economy Program at the Moynihan Institute of Global Affairs