Turbulence, Firm Decentralization and Growth in Bad Times

59 Pages Posted: 1 May 2017

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Brian Lucking

Stanford University

Raffaella Sadun

Harvard University - Strategy Unit; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Abstract

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.

Keywords: decentralization, growth, turbulence, Great Recession

JEL Classification: O31, O32, O33, F23

Suggested Citation

Aghion, Philippe and Bloom, Nicholas and Lucking, Brian and Sadun, Raffaella and Van Reenen, John Michael, Turbulence, Firm Decentralization and Growth in Bad Times. IZA Discussion Paper No. 10706. Available at SSRN: https://ssrn.com/abstract=2960495

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Nicholas Bloom

Stanford University - Department of Economics ( email )

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HOME PAGE: http://economics.stanford.edu/faculty/bloom

National Bureau of Economic Research (NBER) ( email )

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Brian Lucking

Stanford University ( email )

Raffaella Sadun

Harvard University - Strategy Unit ( email )

Harvard Business School
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London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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Stanford Graduate School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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