What is it about?
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.
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Why is it important?
This is the first paper which formally characterizes when a family firm becomes a professional firm.
Perspectives
I had a deep understanding of the principal-agent problem after finishing this paper. My coauthor taught me.
Professor Utpal Bhattacharya
Hong Kong University of Science and Technology
Read the Original
This page is a summary of: From Cronies to Professionals: The Evolution of Family Firms, SSRN Electronic Journal, January 2002, Elsevier,
DOI: 10.2139/ssrn.306130.
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