Turbulence, firm decentralization and growth in bad times

Philippe Aghion, Nicholas Bloom, Brian Lucking, Raffaella Sadun and John van Reenen

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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. (JEL D22, G12, G32, G34, L23)

JEL-codes: G12 G32 G34 L23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2021-01-01
New Economics Papers: this item is included in nep-cfn and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in American Economic Journal: Applied Economics, 1, January, 2021, 13(1), pp. 133 - 169. ISSN: 1945-7782

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