From Cronies to Professionals: The Evolution of Family Firms
Indiana University - Department of Finance
Federal Reserve Bank of Saint Louis
We develop a dynamic model where each generation in a family 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.
Number of Pages in PDF File: 19
Keywords: Family business, agency theory, corporate governance
JEL Classification: G30, F30, J41working papers series
Date posted: April 19, 2002
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