Post date: Nov 12, 2012 5:46:12 AM
"Family Ties and Organizational Design: Evidence from Chinese Private Firms" by Hongbin Cai, Hongbin Li, Albert Park, Li-An Zhou
In European, family firms decline after industry revolution.
This paper uses principle-agent model to design incentive compatible contract for family-related workers and outside workers. One empirical question is how to explain different preferences. Firm head, principle, is risk neutral and agents are risk averse. This imposes first order selection. To think about the economic intuition behind this assumption, we should answer the following questions first. Does firm head want managers to be risk neutral or averse? How to explain the asymmetry between the firm head and managers? Besides, there might be alternative explanations for the empirical results. Considering the heterogeneity of organization of firms, is the data exchangeable?
The observation from this survey tells us that relatives are more likely to work in accounting related position and less likely to work in R&D department. Usually, there are different types of risk associated with the accounting department and R&D department. Principle is typically worried about the hidden action hazard of accounting related jobs and moral hazard of R&D related job. Family members are more reliable that they are less likely to diverse the dividend out of the firm.
Other observations are: the wage rates of relatives are significantly higher than non-relative, the decision rights of relatives are larger. Firm head is more likely to trust his relatives more; besides, he knows his relatives better that he is able to find better match of job portfolio for the relatives.