What is it about?

This paper models a family business as a household operating a production technology in which the household’s human capital is a specific business skill. Each generation in the household can either bequeath the business and the business skill to the next generation, or sell the business through a financial intermediary and bequeath the revenue to the next generation. Using a dynamic model, we analyze how the imperfections in primary capital markets affect the evolution of family businesses. Whether recourse to external financing exists or not, our model predicts that family businesses will tend to be bigger and last longer in economies with less developed primary capital markets.

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Why is it important?

This is the first paper which formally models a family business. The model has testable implications that are intuitive.

Perspectives

The modeling in this paper introduced me to the methodology of dynamic programming.

Professor Utpal Bhattacharya
Hong Kong University of Science and Technology

Read the Original

This page is a summary of: Capital Markets and the Evolution of Family Businesses, The Journal of Business, April 2001, University of Chicago Press,
DOI: 10.1086/209670.
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