1. Caselli: Department of Economics, London School of Economics, Houghton Street, London W2A 2AE, UK. Phone (+44) 20 7955 7498, Fax (+44) 20 7955 6592, E-mail F.caselli@lse.ac.uk
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    1. Gennaioli: Department of Economics, CREI, Universitat Pompeu Fabra, Calle Ramon Trias Fargas 25-27, Barcelona, Catalunya 8005, Spain. Phone (+34) 93 542 2765, Fax (+34) 93 542 2826, E-mail ngennaioli@crei.cat
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    • We acknowledge useful comments by Nick Bloom, Max Bruche, Gian Luca Clementi, Luigi Guiso, Berthold Herrendorf, Bart Hobijn, Tim Kehoe, Pete Klenow, Casey Mulligan, Vincenzo Quadrini, Richard Rogerson, Jim Schmitz, Andrei Shleifer, Silvana Tenreyro, John Van Reenen, and anonymous referees. Jas Ellis was the invaluable research assistant. N.G. thanks the Spanish Ministerio de Ciencia y Tecnologia (Ramon y Cajal Grant) and the Barcelona GSE Research Network for financial support.


The most striking difference in corporate-governance arrangements between rich and poor countries is that the latter rely much more heavily on the dynastic family firm, where ownership and control are passed on from one generation to the other. We argue that if the heir to the family firm has no talent for managerial decision making, dynastic management is a failure of meritocracy that reduces a firm's total factor productivity (TFP). We present a simple model that studies the macroeconomic causes and consequences of dynastic management. In our model, the incidence of dynastic management depends, among other factors, on the imperfections of contractual enforcement. A plausible calibration suggests that, via dynastic management, poor contract enforcement may be a substantial contributor to observed cross-country differences in aggregate TFP. (JEL O43, O47, G32)