Participation and decision making in family firms

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.