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Turbulence, Firm Decentralization, and Growth in Bad Times

Author

Listed:
  • Philippe Aghion
  • Nicholas Bloom
  • Brian Lucking
  • Raffaella Sadun
  • John Van Reenen

Abstract

What is the optimal form of firm organization during "bad times"? The greater turbulence following macro shocks may benefit decentralized firms because the value of local information increases (the "localist" view). On the other hand, the need to make tough decisions may favor centralized firms (the "centralist" view). Using two large micro datasets on decentralization in firms in ten OECD countries (WMS) and US establishments (MOPS administrative data), we find that firms that delegated more power from the central headquarters to local plant managers prior to the Great Recession outperformed their centralized counterparts in sectors that were hardest hit by the subsequent crisis (as measured by export growth and product durability). Results based on measures of turbulence based on product churn and stock market volatility provide further support to the localist view. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although decentralization will be suboptimal in many environments, it does appear to be beneficial for the average firm during bad times.

Suggested Citation

  • Philippe Aghion & Nicholas Bloom & Brian Lucking & Raffaella Sadun & John Van Reenen, 2021. "Turbulence, Firm Decentralization, and Growth in Bad Times," American Economic Journal: Applied Economics, American Economic Association, vol. 13(1), pages 133-169, January.
    • Handle: RePEc:aea:aejapp:v:13:y:2021:i:1:p:133-69
    DOI: 10.1257/app.20180752
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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    1. Turbulence, Firm Decentralization, and Growth in Bad Times (American Economic Journal: Applied Economics 2021) in ReplicationWiki

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