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Turbulence, Firm Decentralization and Growth in Bad Times

Listed author(s):
  • Aghion, Philippe

    ()

    (Birkbeck College, University of London)

  • Bloom, Nicholas

    ()

    (Stanford University)

  • Lucking, Brian

    ()

    (Stanford University)

  • Sadun, Raffaella

    ()

    (Harvard Business School)

  • Van Reenen, John

    ()

    (MIT Sloan School of Management)

What is the optimal form of firm organization during "bad times"? Using two large micro datasets on firm decentralization from US administrative data and 10 OECD countries, we find that firms that delegated more power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis. We present a model where higher turbulence benefits decentralized firms because the value of local information and urgent action increases. Since turbulence rises in severe downturns, decentralized firms do relatively better. We show that the data support our model over alternative explanations such as recession-induced reduction in agency costs (due to managerial fears of bankruptcy) and changing coordination costs. Countries with more decentralized firms (like the US) weathered the 2008–09 Great Recession better: these organizational differences could account for about 16% of international differences in post-crisis GDP growth.

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File URL: http://ftp.iza.org/dp10706.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10706.

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Length: 59 pages
Date of creation: Apr 2017
Handle: RePEc:iza:izadps:dp10706
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  1. N. Bloom., 2016. "Fluctuations in uncertainty," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
  2. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2012. "Credit Constraints And The Cyclicality Of R&D Investment: Evidence From France," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1001-1024, October.
  3. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1351-1408.
  4. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 675-702, August.
  5. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 339-376.
  6. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
  7. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
  8. Luis Garicano & Luis Rayo, 2016. "Why Organizations Fail: Models and Cases," Journal of Economic Literature, American Economic Association, vol. 54(1), pages 137-192, March.
  9. Phillipe Aghion & Nicholas Bloom & John Van Reenen, 2014. "Incomplete Contracts and the Internal Organization of Firms," Journal of Law, Economics and Organization, Oxford University Press, vol. 30(suppl_1), pages 37-63.
  10. Gabriel Chodorow-Reich, 2014. "The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008-9 Financial Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 1-59.
  11. Maria Guadalupe & Julie Wulf, 2010. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 105-127, October.
  12. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilberte Cette & Laurent Eymard, 2012. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from Micro Panel data," Post-Print halshs-00754573, HAL.
  13. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
  14. D'Aurizio, Leandro & Oliviero, Tommaso & Romano, Livio, 2015. "Family firms, soft information and bank lending in a financial crisis," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 279-292.
  15. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  16. repec:hrv:faseco:30752812 is not listed on IDEAS
  17. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
  18. Laura Alfaro & Maggie Xiaoyang Chen, 2012. "Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 30-55, August.
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