Bonnie Nguyen, Andrew Wait

Participation and decision making in family firms

Introduction

Participation and decision making in family firms. Analyze altruism's role in family firm decision-making. Compare participation & rights in family vs. non-family firms. Covers agent choices, succession, and performance.

Abstract

Altruism drives many economic decisions. We explore the implications of altruistic preferences for the organization of family firms. Adapting Aghion and Tirole (1997), we compare the allocation of decision-making rights in family and non-family firms. The distinguishing feature of a family firm is that the principal is altruistic towards the blood-related agent. Taking participation of the agent as given, we characterize sufficient conditions for centralization in both non-family and family firms. We then consider the agent’s choice of where to work. When the principal chooses the allocation of decision-making rights and the agent chooses where they work, centralization occurs in a broader range of circumstances in family firms than in nonfamily firms, consistent with empirical evidence. We also show that: an agent might choose to remain working at a decentralized family firm, even though they would prefer decision making to be centralized; and an agent might choose to remain in a centralized family firm, even when it does not undertake the type of work preferred by the agent. We relate our findings to the relative performance of family versus non-family firms, and to issues of succession.Key words: decision-making rights, decentralization, family ownership, altruism. JEL classifications: D23, L23, L29.

Review

This paper presents a compelling theoretical analysis of decision-making and participation within family firms, distinguishing them from non-family firms through the explicit inclusion of altruistic preferences. By adapting the seminal framework of Aghion and Tirole (1997), the authors meticulously explore how a principal's altruism towards a blood-related agent shapes the allocation of decision-making rights. A core contribution is the finding that centralization of decision-making occurs in a broader range of circumstances in family firms compared to non-family firms, a result robustly shown to align with existing empirical evidence. The study further reveals nuanced, and at times counter-intuitive, dynamics of agent behavior, demonstrating instances where agents may choose to remain in family firms even when their preferred decision-making structure or work type is not present. The strength of this work lies in its rigorous theoretical foundation and the innovative application of an established economic model to a distinct organizational form. The adaptation of Aghion and Tirole (1997) is particularly effective, allowing for a clear and systematic comparison between family and non-family firm structures. The authors' methodical approach, initially treating agent participation as given before endogenizing it, provides a robust examination of the underlying mechanisms. The insights into agent motivation, specifically the conditions under which an altruistic principal can lead to situations where agents accept less-than-ideal circumstances (e.g., remaining in a centralized firm despite preferring decentralization, or staying in a firm not undertaking preferred work), are particularly illuminating and add significant depth to our understanding of the unique psychological and economic contracts within family businesses. The implications of this research are substantial, extending beyond theoretical contributions to offer practical insights for understanding family firm dynamics, succession planning, and performance. By linking their findings to the relative performance of family versus non-family firms, the authors provide a valuable lens through which to interpret observed differences. While the paper establishes a strong theoretical baseline, future research could explore the heterogeneity of altruistic relationships, perhaps by considering varying degrees of altruism or its evolution across generations. Nonetheless, this paper makes a significant contribution to the literature on family firms and organizational economics, providing a solid theoretical framework for explaining complex decision-making patterns observed in these prevalent and economically vital organizations.

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