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From Cronies to Professionals: The Evolution of Family Firms

  • Bhattacharya, Utpal
  • Ravikumar, B

We develop a dynamic model where each generation in a family firm can continue operating its inherited production technology or it could hire a professional to do the same. Though the professional is more qualified, his interests are not aligned with the interests of the family. In the context of an overlapping generations framework, we analyze how this tradeoff affects the evolution of the family firm. We find that family firms initially grow in size by accumulating capital and later professionalize their management after reaching a critical size.

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File URL: http://mpra.ub.uni-muenchen.de/22939/1/MPRA_paper_22939.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22939.

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Date of creation: Nov 1997
Date of revision: Jan 2004
Handle: RePEc:pra:mprapa:22939
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  1. Burkart, Mike & Panunzi, Fausto & Shleifer, Andrei, 2002. "Family Firms," CEPR Discussion Papers 3234, C.E.P.R. Discussion Papers.
    • Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2202, October.
  2. Heckerman, Donald G., 1975. "Motivating managers to make investment decisions," Journal of Financial Economics, Elsevier, vol. 2(3), pages 273-292, September.
  3. Bhattacharya, Utpal & Ravikumar, B, 2001. "Capital Markets and the Evolution of Family Businesses," The Journal of Business, University of Chicago Press, vol. 74(2), pages 187-219, April.
  4. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
  5. Pollak, Robert A, 1985. "A Transaction Cost Approach to Families and Households," Journal of Economic Literature, American Economic Association, vol. 23(2), pages 581-608, June.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  7. Berhold, Marvin, 1971. "A Theory of Linear Profit-Sharing Incentives," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 460-82, August.
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