Centre for Vocational Education Research LSE RSS Email Facebook Twitter


CEP discussion paper
Turbulence, firm decentralization and growth in bad times
Philippe Aghion, Nicholas Bloom, Brian Lucking, Raffaella Sadun and John Van Reenen April 2017
Paper No' CEPDP1479:
Full Paper (pdf)

JEL Classification: O31; 032; 033; F23

Tags: decentralization; growth; turbulence; great recession

What is the optimal form of firm organization during 'bad times'? The greater turbulence following macro shocks may benefit decentralized firms because the value of local information increases (the 'localist' view). On the other hand, the need to make tough decisions may favor centralized firms (the 'centralist' view). Using two large micro datasets on decentralization in firms in ten OECD countries (WMS) and US establishments (MOPS administrative data), we find that firms that delegated more power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis (as measured by the exogenous component of export growth and product durability). Results based on measures of turbulence based on product churn and stock market volatility provide further support to the localist view. This conclusion is robust to alternative explanations such as managerial fears of bankruptcy and changing coordination costs. Although decentralization will be sub-optimal in many environments, it does appear to be beneficial for the average firm during bad times.