MEASURING AND EXPLAINING MANAGEMENT

PRACTICES ACROSS FIRMS AND COUNTRIES

February 2006

Nick Bloom
Stanford, Centre for Economic Performance and AIM

John Van Reenen
LSE and Centre for Economic Performance

MOTIVATION
Large persistent profit and productivity spread across firms
and countries - Economists since Marshall typically claim this is
due to differences in management ability

But what is the role of management?

Is management simply Good or Bad; or

Does management vary optimally according to firms
conditions different styles

And why does it vary so much across firms and countries?

SUMMARY OF THE PAPER (1 of 3)
(1) Measuring Management
Develop a survey tool to measure management practices
New data on 732 firms in US,UK, France & Germany.

Management data:
Correlated productivity, profits, Tobins Q, growth &
survival - there is Good and Bad management
Correlated environment also some optimal response
Robust to measurement error and bias

This survey tool can be applied much more broadly - e.g.
empirically modelling firm organisational structures

SUMMARY OF THE PAPER (2 of 3)
(2) Explaining Management

Observe big spread in management practices (Fig. 2 over)
Wide cross firm spread (like profits & productivity)
Significant differences across countries
US 1
st
, Germany 2
nd
, France 3
rd
and UK 4
th


Demonstrate that two factors appear significant:
Production market competition positive effect
Family managed firms negative effect
Family firm ownership but not management is fine
Family ownership and management problematic,
particularly under primo geniture CEO succession

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FIRM LEVEL AVERAGE MANAGEMENT SCORES
France n=137 n=157
n=290 n=154 UK US
Germany

SUMMARY OF THE PAPER (3 of 3)
(3) Quantifying this Effect

Competition and family-management important, explains:
(a) Over 50% of the tail of badly managed firms

(b) Between 1/3 to 2/3 of US-Europe management gap:
Europe has lower levels of competition
UK & France also many more primo geniture
family firms due to Norman legal origin & tradition

Our management measure can account for up to 20%
(OLS) or 60% (IV) of the productivity dispersion

1. Why should management practices vary?

2. Measuring management practices

3. Evaluating the reliability of this measure

4. Describing management across firms & countries

5. Explaining management across firms & countries
OUTLINE

Why Should Management Practices Vary?
Two models - not mutually exclusive

Optimal choice of management practices
Another factor of production (like advertising)
No better or worse style of management depends
on firms circumstances

Exogenous managerial inefficiency
Part of total-factor productivity
Strictly better or worse styles of management

Empirically we find some support for both

Pure Models of Management Practices (1/2)
Optimal choice of management practices




with M
1
and M
2
management practices (i.e. physical & human
capital management) costing
1
and
2
, wit impact B
1
and B
2

Simple predictions from FOC:
Productivity will be correlated with management
Profitability will not be correlated with management
Ratio M
1
/M
2
will be correlated with B
1
/B
2
and P
2
/P
1
i.e. relative importance and price of skills
( ) ( )
1
1
2 2
1
1 1

+ =
o
o
o
o
o
o
M B M B Y

Pure Models of Management Practices (1/2)
Exogenous managerial inefficiency part of TFP
Mundlak (1961) and Lucas (1978) style concept of productivity
differences:



where M scale indicator of management practices, A(M) is TFP
and dA(M)/dM

> 0

Simple predictions from FOC:
Productivity will be correlated with management
Profitability will be correlated with management
Ratio M1/M2 will not be correlated with B1/B2 and P2/P1
) ( ) ( X M A Y =

1. Why should management practices vary?

2. Measuring management practices

3. Evaluating the reliability of this measure

4. Describing management across firms & countries

5. Explaining management across firms & countries

SOME RELATED LITERATURE - EXAMPLES
Management, organisation & performance
HRM / Management practices:
Ichinowski, Shaw, and Prenushi (1997),
Ichinowski and Shaw (1995), Black and
Lynch (2001), and Lazear (2000); Bartel,
Ichniowski and Shaw (2004)
Organisational practices: Bresnahan,
Brynjolfsson and Hitt (2002) and Caroli
and Van Reenen (2001)
Individual managers: Bertrand and
Schoar (2003)
Competition and firm performance
Empirics: Nickell (1996), Syverson
(2004), and Aghion, Bloom, Blundell,
Griffith, and Howitt (2005)
Dynamic theory: Jovanovic (1982)
and Hopenhayn (1992)
Theory: Schmidt (1997), Raith
(2003) and Vives (2004)
Productivity dispersion & dynamics
Establishments: Baily, Hulten, and
Campbell (1992), Bartelsman and
Dhrymes (1998), and Jensen,
McGuckin and Stiroh (2001), Foster,
Haltiwanger and Syverson (2003)
Countries: OMahony & Van Ark (2004),
Caselli (2005)
Family firms
Empirical: La Porta, Lopez-De-
Silanes and Schleifer (1999),
Bertrand et al (2004), Sraer &
Thesmar (2004), Bennedsen,
Nielsen, Perez-Gonzales &
Woflenzon (2005)
Theory: Burkart, Panunzi and
Schleifer (2003), Caselli and
Gennaioli (2005)
Economic History: Landes (1969),
Chandler (1994), Nicholas (1999)

STEPS TO TRY TO MEASURE MANAGEMENT
1) Developing management scoring
Scorecard for key practices (next slide)
1 hour telephone interview of (manufacturing plant) managers

2) Obtaining unbiased responses
Double-blind
Managers are not informed (in advance) they are scored
Interviewers do not know company performance
Detailed controls for interviewee, interviewer & timing

3) Getting firms to participate in the interview
Introduced as Lean-manufacturing interview, no financials
Endorsement of Bundesbank ,UK Treasury, Banque de France
Run by 10 MBAs (loud, pushy & business experience)

SCORECARD COVERS 18 QUESTIONS IN 4 AREAS
Initially Developed by an international management consultancy

All questions & 50 examples in the paper in summary:

OPERATIONS (3 questions) problem fixing, standard Lean
manufacturing


MONITORING (5) - tracking, review & evaluation, follow-up etc.


TARGETS (5) - transparent, stretching, inter-connected, time
horizon, etc


INCENTIVES (5) - promotions, rewards, fix/fire, retention etc.

Score (1) Measures tracked
do not indicate
directly if overall
business objectives
are being met.
Certain processes
arent tracked at all .
(3) Most key
performance
indicators are
tracked formally.
Tracking is overseen
by senior
management.
(5) Performance is
continuously tracked and
communicated, both
formally and informally, to
all staff using a range of
visual management tools.
E.G. A US manager who
tracked a range of
measures when he
didnt think output
was sufficient. He last
requested reports 8
months ago, checked
them for one week,
and then stopped
checking once output
had increased again
A US firm bar-
coded every product,
and performance
indicators were
tracked throughout
the production;
however this
information was not
communicated to
workers
A US firm had screens
visible to every production
line displaying hourly
progress to target. The plant
manager met daily with the
shop floor to discuss these.
He even stamped canteen
napkins with key
performance achievements
MONITORING - i.e. HOW IS PERFORMANCE TRACKED?

MANAGEMENT SURVEY SAMPLE
US (290), UK, France and Germany (150 each)

Medium sized manufacturers (50 - 10,000 employees, median
700)
Medium sized because firm practices more homogeneous
Manufacturing as easier to measure productivity

Obtained 54% coverage rate from sampling frame
Response rates uncorrelated with performance measures

SAMPLE NOISE/BIAS CONTROLS
8 INTERVIEWEE CONTROLS
Gender, seniority, post tenure, firm tenure, countries worked
in, foreign, worked in US, plant location, reliability score

3 INTERVIEWER CONTROLS
Set of analyst dummies, cumulative interviews run, prior firm
contacts

5 TIME CONTROLS
Day of the week, time of day (interviewer), time of the day
(interviewee), duration of interview, days from project start

ADDITIONAL MATCHED DATA WE COLLECTED
HR Survey
Skills, demographics, hours, organisational characteristics,
number of competitors etc.

Ownership & Family Survey
Shareholders & managerial characteristics, family involvement,
family progression rules etc.

Performance Data
Separately match company accounts - so collect management
and performance data from completely different sources

Industry and Trade Data
OECD

1. Why should management practices vary?

2. Measuring management practices

3. Evaluating the reliability of this measure
a) Internal/External validation
b) Contingency
c) Measurement error/bias

4. Describing management across firms & countries

5. Explaining management across firms & countries

INTERVAL VALIDATION OF THE SCORING
1
2
3
4
5
1 2 3 4 5
`
1
st
interview
2
n
d

i
n
t
e
r
v
i
e
w

Re-interviewed 64 firms with different interviewers and managers
Firm average scores (over 18 question)

Firm-level average
correlation of 0.759

EXTERNAL VALIDATION OF THE SCORING
Performance
measure
c
it
c
it
c c
it
m
c c
it
k
c c
it
l
c c
i
c
it
u x m k l MNG y + + + + + = ' o o o |
ln(capital)
ln(materials)
management
(average z-scores)
ln(labor)
other controls
Use up to 11 years of accounting data for 1994-2004
country c

Note not a causal estimation, only an association

Dependent
variable
Sales
(in Ln)

Sales
(in Ln)

Sales
(in Ln)
ROCE Tobin Q
(in Ln)
Sales
growth
Exit
Estimation
1
OLS OLS OLS OLS OLS OLS Probit
Firms All All All All Quoted All All
Management
i

0.085
(0.025)
0.034
(0.011)
0.042
(0.012)
2.469
(0.688)
0.250
(0.075)-
0.018
(0.006)
-0.200
[0.026]
Ln(Labor)
it

0.999
(0.014)
0.539
(0.021)
0.540
(0.021)
2.172
(1.202)
0.209
(0.109)
-0.022
(0.011)
0.233
[0.045]
Ln(Capital)
it

0.103
(0.013)
0.104
(0.013)
-0.148
(0.899)
-0.029
(0.086)
0.024
(0.008)
-0.158
[0.045]
Ln(Materials)
it

0.362
(0.020)
0.354
(0.020)
-0.439
(0.723)
0.130
(0.050)
-0.010
(0.007)
-0.084
[0.231]
Controls
1
No Yes Yes Yes Yes Yes Yes
Noise controls No No Yes Yes Yes Yes Yes
Observations 6,267 5,350 5,350 5,089 2,635 4,777 709
Firms 732 709 709 690 374 702 709
EXTERNAL VALIDATION: PRODUCTIVITY & PROFIT
1
Includes country, year, SIC3 industry, skills, hours, firm-age, and public/private
Robust S.E.s in ( ) below. For probit p-values in [ ] below

EXTERNAL VALIDATION ROBUSTNESS
Productivity correlations robust to type of TFP estimation
OLS, Olley-Pakes, GMM & Within-Groups

Results also significant in most recent cross-section (2003/04)

Results significant in both Anglo-Saxon (US and UK) and
European (France and Germany) countries



CONTINGENT MANAGEMENT PRACTICES
Dependent Var
HC
Manage
ment

FC
Manage
ment

HC-FC
Manage
ment
HC-FC
Manage
ment
HC-FC
Manage
ment
Level

Firm Firm Firm Firm Industry
Ln (% degrees)
i

firm level
0.220
(0.039)
0.100
(0.043)
0.120
(0.043)
Ln (ave wage)
i

firm level
0.337
(0.122)
Ln (% degrees)
j

Industry level (US)
0.281
(0.169)
Standard Errors Robust Robust Robust Robust Clustered
Firms 732 732 732 424 732
Note: HC management average z-score of the 3 most human capital focused
questions (questions 13, 17 and 18). FC management average z-score of the
3 most fixed capital focused questions (1, 2 and 4). HC-PC management is
the difference of these two measures.

CONCERNS WITH OUR MANAGEMENT MEASURE?
Three potential issues:
1) Measurement error (classical), but
Attenuation downwardly biases our results
We try to control for this with Noise controls
(management & interview characteristics)

CONCERNS WITH OUR MANAGEMENT MEASURE?
(2) Firm performance-related measurement bias in
management score (i.e. good firms talk-up practices), but
Surveying methodology designed to try to minimize this
Competition and management positively linked (later)
Management-performance link is as important in France &
Germany (where managers less likely to talk up Anglo-
Saxon practices) as it is in UK & US
No link between past productivity growth & management
Not all questions significant (and not linked to subjectivity)
Other subjective questions insignificant i.e. feel-good work-
life balance questions, organisational devolvement questions
So potential problem but no evidence that major phenomenon

CONCERNS WITH OUR MANAGEMENT RESULTS?

(3) Reverse causality (management correctly measured
but better firm performance causes better management),

Main point of performance estimations is external
validity of the measure

But if interpretation is effect of management on
productivity note that the bias is ambiguous

When use IV (later) management coefficient
increases substantially


1. Measuring management practices


2. Evaluating the reliability of this measure


3. Describing management across firms & countries


4. Explaining management across firms & countries:
- competition
- family managed firms
OUTLINE

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FIRM LEVEL AVERAGE MANAGEMENT SCORES
France n=137 n=157
n=290 n=154 UK US
Germany

COUNTRY LEVEL MANAGEMENT SCORES*
3.07
3.14
3.31
3.35
US
Germany
UK
Typical UK managers?
* With controls for size & public/private values are 3.35, 3.27, 3.16 & 3.07 respectively.
Gaps between UK/France and the US significant at the 5% level
Bad manufacturing management - a UK tradition?

Efficient management is the single most significant factor
in the American productivity advantage
[Marshall Plan Anglo-American productivity mission, 1947]
France

1. Measuring management practices


2. Evaluating the reliability of this measure


3. Describing management across firms & countries


4. Explaining management across firms & countries:
- competition
- family managed firms
OUTLINE

Competition & Models of Management Practices
Exogenous managerial inefficiency positive impact
Selection models Hopenhayn (1992) or Syverson (2004)



Optimal choice model ambiguous impact
In contracting models balance between opposing profit
and market-size effects (Raith 2003, Vives 2004).



Competition proxies Dependent variable: Management
Import penetration
(SIC-3 industry,
1995-1999)
0.144
(0.040)
0.156
(0.084)
1 - Lerner index
1

(SIC-3 industry except
firm itself, 1995-1999)
1.515
(0.683)
1.318
(0.637)
# of competitors
(Firm level,
2004)
0.142
(0.051)
0.145
(0.049)
Full controls
2,3
No Yes No Yes No Yes
COMPETITION AND MANAGEMENT PRACTICES (TABLE 4)
1
Lerner index = (operating profit capital costs)/sales rents
2
Includes 108 SIC-3 industry, country, firm-size, public and interview noise
(analyst, time, date, and manager characteristic) controls, = 732 obs
3
S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry
3 competition proxies from Nickell (1996) & Aghion et al. (2005)

FAMILY FIRMS & MANAGEMENT AN OLD TOPIC
Alfred Chandler
1
and David Landes
2
both claimed UK & French
industrial decline relative to US & Germany linked to family firms

The Britain of the late 19
th
Century basked complacently in
the sunset of economic hegemony. Now it was the turn of the
3
rd
generationand the weakness of British enterprise
reflected their combination of amateurism and complacency

French enterprise was family-owned and operated, security-
orientated rather than risk-taking, technologically conservative
and economically inefficient
1
Alfred Chandler, Scale and Scope: The Dynamics of Industrial Capitalism, (1994)
2
David Landes, The Unbound Prometheus: Technological Change and Industrial
Development in Western Europe from 1750 to the Present, (1969)

WE DO FIND GREATER UK & FRENCH FAMILY
MANAGEMENT IN OUR DATA (100 YEARS ON),
% UK Fra Ger US
Family
1
largest shareholder 30 32 30 10
Family
1
largest shareholder
and family CEO
23 22 12 7
Family
1
largest shareholder,
family CEO & primo geniture
2
15 14 3 3
1
Family defined as 2
nd
generation or beyond (so not the founder).
Shareholdings combined across all family members.
2
Based on question: How was management of the firm passed down:
was it to the eldest son or by some other way?. Non primo geniture
alternatives in frequency order: other sons, son in-laws, daughters,
brothers, wives, nephews and cousins.

WHY DOES FAMILY INVOLVEMENT VARY ACROSS
COUNTRIES?
Historical differences
UK & France tradition of Primo Geniture:
[Oxford English Dictionary, 2005]
Feudal rule of inheritance introduced into England by the
Norman Conquest. Replaced Teutonic gavelkind. Obligatory
until the Statute of Wills [1540]. Still common in many places
US and Germany tradition of equal division (Menchik, 1980)

Estate tax headline rates
1
: on family firms (on standard assets)
US 50% (50%); France 25% (40%)
UK = 0% (40%); Germany 15% (45%)
1
Rate on a $25m firm. In practice these taxes are often reduced/avoided by advanced
tax planning, although this involves foresight, financial costs and some control loss.

FAMILY FIRMS AND MODELS OF MANAGEMENT
PRACTICES
Exogenous managerial inefficiency depends on involvement
Ownership but not management probably positive
Concentrated ownership so better monitoring
Management probably negative
Smaller pool to select CEO from
Possible Carnegie effect on future CEOs
Both effects will be worse with primo geniture
(succession of eldest son to CEO position)

Optimal choice model ambiguous impact
Variety possible effects, but unlikely linked to primo
geniture (which is empirically important)

FAMILY OWNERSHIP AND FAMILY MANAGEMENT (TABLE 5)
% Dependent variable: Management
Family
1
largest shareholder
-0.029
(0.094)
0.304
(0.166)
Family
1
largest shareholder &
family CEO
-0.100
(0.078)
-0.175
(0.188)
Family
1
largest shareholder, family
CEO & primo geniture

-0.281
(0.097)
-0.382
(0.128
Observations
2
732 732 732 732
1
Family defined as 2
nd
generation or later
2
Note includes SIC-3 digit, country, skills, firm size, firm age & public controls

REVERSE CAUSALITY AND INSTRUMENTAL VARIABLES
The productivity & management correlations are tests of external
validity of management score, not causal relations
Productivity shocks may cause management (generating bias):
Positive bias: more productive firms buy in better managers
Negative bias: in the more productive firms the managers
can afford to exert less effort
Management regressions suggest possible IVs:
(i) competition; and (ii) family primo geniture management
But need to assume that the only way that competition and primo
geniture

effect productivity is through management - strong

Dependent Var

Ln
(Sales)

Ln
(Sales)

Ln
(Sales)

Ln
(Sales)
Ln (Sales)

Estimation
1
OLS OLS OLS OLS IV
Management

0.042
(0.012)
0.216
(0.097)
Competition
(Import penetr.)
0.089
(0.032)
0.088
(0.032)
Family CEO &
primo geniture
-0.060
(0.030)
-0.058
(0.030)
Instruments
(F-test)
Imports,Family
(20.79)
Over-identifying
restriction (p-val)
0.520
% 75:25 TFP gap
accounted for by
management
12% 63%
I.V. MANAGEMENT IN PRODUCTION FUNCTION
1
Other variables include log(Labor), log(Capital), log(Materials), country, year,
SIC3 industry, skills, hours, firm-age, and public/private. All 709 observations
S.E.s in ( ) below, robust to arbitrary heteroskedasticity

QUANTIFYING THESE EFFECTS:
ACROSS FIRMS
ACROSS COUNTRIES

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Average management score across questions and interviews - note dropping lean3
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Average management score across questions and interviews - note dropping lean3
MANY COMPETITORS AND NO (PG) FAMILY CEO
FEW COMPETITORS AND/OR (PG) FAMILY CEO
2.7% firms in tail
1
9.0% firms in tail
1
1
Tail defined as a score 2. In the whole sample 6.9% of firms are in the tail.
N=415

N=317


Dependent Variable
1
Management
Country is US Baseline Baseline Baseline Baseline
Country is Germany
-0.045
(0.064)
-0.036
(0.063)
-0.004
(0.063)
0.063
(0.067)
Country is France
-0.202
(0.086)
-0. 115
(0.088)
-0.077
(0.088)
-0.021
(0.089)
Country is UK
-0.276
(0.078)
-0.199
(0.076)
-0.188
(0.076)
-0.107
(0.079)
Family owned, family CEO
and primo geniture
-0.658
(0.102)
-0.648
(0.102)
-0.606
(0.100)
# of competitors
0.147
(0.052)
0.154
(0.051)
Ln (% employees with a
degree)
0.134
(0.037)
Observations 732 732 732 732
ACCOUNTING FOR THE CROSS-COUNTRY SCORES
1
OLS estimation on 732 observations
S.E.s in ( ) below, robust to arbitrary heteroskedasticity

TO SUMMARIZE
Original methodology for measuring management
Product market competition & family management important
Explain 50% of tail of badly managed firms
Explain 2/3 of US-France gap & 1/3 of US-UK gap

Immediate 2006 plan follow up with larger survey:
Get 2500 sample and panel dimension
Extend to Italy, Poland and Sweden (and Asia in 2008)
Include questions on organisational structure,
communication and control
Design very flexible so any suggestions welcome
Quotes:


THE WORLD OF MANUFACTURING
Spoke to companies making..
Coffin liners
Plastic balls to stop birds nesting on water near airports
(reported no competitors)
German sex-toys (few exports aimed at domestic tastes)
.and an amazing array of people
I spend most of my time walking around cuddling and
encouraging people - my staff tell me that I give great hugs
[US male manager to an Australian female interviewer]
Your accent is great and I like your talk are you married?
...[long silence].sorry I just got distracted
by a submarine surfacing in front of my office window

BACK-UP

Score (1) Goals are either
too easy or
impossible to
achieve; managers
low-ball estimates
to ensure easy
goals
(3) In most areas, top
management pushes for
aggressive goals based on
solid economic rationale.
There are a few "sacred
cows" not held to the
same rigorous standard
(5) Goals are genuinely
demanding for all
divisions. They are
grounded in solid,
solid economic rational
E.G. A French firm uses
easy targets to
improve staff
morale. They find it
difficult to set
harder goals
because people give
up and managers
refuse to work
people harder
A chemicals firm has 2
divisions, producing
special chemicals for
military and civilian
markets. Easier levels of
targets are requested from
the founding and more
prestigious military
division.
A UK manager insists
that he sets aggressive
and demanding goals
for everyone even
security. If they hit all
their targets he worries
he hasnt stretched
them enough.
TARGETS e.g. TARGETS ARE STRETCHING (Q.11)

Score (1) People are
promoted primarily
upon the basis of
tenure
(3) People are
promoted upon the
basis of
performance
(5) We actively identify,
develop and promote our
top performers
E.G. A UK firm promotes
based on an
individuals
commitment to the
company, typically
measured by
experience. Almost
all employees move
up in lock-step.
People learn on the
job and are
promoted based on
their performance
on the job.
In a UK firm each employee
is thoroughly assessed every
6 months and given a red
light (not performing), amber
light (doing well on track)
a green light (high performer
- promote) and a blue light
(extreme performer -
promote twice)
INCENTIVES e.g. PROMOTIONS (Q.16)

3.58
3.25
3.13
US FIRMS ARE ALSO BETTER IN EUROPE
Average management score by firm type
in UK, France and Germany*
Domestic
Non-US multinational
subsidiary
US multinational
subsidiary
* Controls for any sample selection on size (direct and group) and listing
# in sample
379
44
20

-
.
2
-
.
1
0
.
1
.
2
e
p
h
i
_
o
r
i
g
/
e
p
h
i
_
p
5
/
e
p
h
i
_
p
9
5
1 2 3 4 5
Log firm age
ephi_orig ephi_p5
ephi_p95
AGE AND MANAGEMENT PRACTICES (KERNEL
1
)
Firm age (in logs)
M
a
n
a
g
e
m
e
n
t

s
c
o
r
e

10 years
1
Point-wise confidence intervals (in feint) generated from 1000 bootstraps
75 years

3
4
5
6
7
S
a
l
e
s

p
e
r

e
m
p
l
o
y
e
e
-2 -1 0 1 2
Management Score
bandwidth = .8
Lowess smoother

FAMILY OWNERSHIP PROBIT
Dependent variable
Family owned, family
CEO & primo geniture
1
Country = UK
0.109
[0.015]
Country = France
0. 096
[0.042]
Country = Germany
0.058
[0.303]
Log (employees)
-0.022
[0.012]
Log (firm-age)
0.052
[0.017]
Industry controls Yes
Observations 718
1
Marginal effects, p-values in [ ] brackets underneath

EFFORT EFFECTS OF COMPETITION (APPENDIX E)
With fixed number of firms ambiguous
(Schmidt 1997; Raith 2003; Vives 2004 )
Bankruptcy effect: competition increases effort as
managers strive to avoid bankruptcy (+
tive
)
Business stealing effect: competition makes market
share more sensitive to differences in marginal cost,
increasing contracting on effort (+
tive
)
Scale effect: competition lowers profits so lowers
returns to increasing market share, reducing contracting
on effort (-
tive
)
Raith (2003) Under free entry higher competition reduces
number of firms scale effect switched off, comp
unambiguously +
tive


SOME LIMITED EVIDENCE FOR EFFORT EFFECTS?
*Includes 108 SIC-3 digit dummies, country dummies, firm size and type
S.E.s robust to arbitrary heteroskedasticity, clustered by country-industry
Dependent
variable
Managerial Hours Worked
Lerner index
(5-yr lagged)
6.660
(4.129)
1.809
(5.869)
Import penetration
(5-yr lagged)
-0.230
(0.444)
1.082
(0.948)
Number of
competitors
1.155
(0.509)
0.935
(0.623)
Firms 727 727 733 733 733 733
Observations 727 727 733 733 733 733
Full controls* No Yes No Yes No Yes

THE SELECTION EFFECTS OF COMPETITION
Pure Selection effects predicts older firms better managed

But Vintage effects predict older firms worse managed
Management practices improve over time
But organisational adjustment costs (Shaw et al, 1997)
So firms do not fully keep up with the frontier

Simulate this with a Hopenhayn (1992) style model assuming
Equilibrium rate of entry and exit (2%)
Entrants from relative upward trending normal distribution
Exits by noisy signal of management ability

COMPETITION AND AGE SIMULATION
Firm age (in logs)
M
a
n
a
g
e
m
e
n
t

s
c
o
r
e

Kernels of age vs. management score for simulated data*
* see http://cep.lse.ac.uk/matlabcode