Never Waste a Good Crisis? Growth and Decentralization in the Great Recession

Abstract:

We argue that decentralization is particularly beneficial to firm performance in “bad times”. We present a model where bad times increase the importance of rapid action, and improve the alignment of incentives of managers within firms. We test this idea exploiting the 2008-2009 Great Recession using firm-level cross country panel data combined with our survey data on firm organization. Firms who decentralized more decisions to local managers prior to the (industry- country specific) recession shock had better sales growth and TFP growth than their more centralized peers. Firms that scored one standard deviation above the mean on our decentralization measure shrank half as slowly in industries hit by a crisis. This relationship is particularly strong in environments where uncertainty increased most severely and where pre-existing agency problems were greatest.