Notes from Does Management Matter? Evidence from India, by Bloom et al

  • Yesterday, I had linked to a paper by Bloom et al, and said that it would be a good place to start reading about productivity, particularly from an Indian point of view. Here are my notes from the paper:

  • As per Hsieh and Klenow the ratio of TFP in Indian and Chinese firms is 5(!) between the 90th and the 10th percentile
  • The quality of management, and therefore management practices, is one explanatory factor
  • Economists tend to not buy into this because they assume that profit maximization implies cost minimization
  • So in other words, if firms are not minimizing costs by adopting good management practices, it is because “wages are so low that repairing defects is cheap. Hence, their management practices are not bad, but the optimal response to low wages.”
  • In this paper, large multiplant textile firms were split into treatment and control groups. The treatment groups were given management consulting from a top consulting group, the control groups weren’t.
  • The result: “We estimate that within the first year productivity increased by 17%; based on these changes we impute that annual profitability increased by over $300,000. These better-managed firms also appeared to grow faster, with suggestive evidence that better management allowed them to delegate more and open more production plants in the three years following the start of the experiment. These firms also spread these management improvements from their treatment plants to other plants they owned, providing revealed preference evidence on their beneficial impact.”
  • So why wasn’t this being done already?
    • No need, because benchmarking was with local competition, who weren’t doing it anyway
    • Simple lack of awareness
    • A naïve belief that nothing would change by adopting these practices
  • But even within local competition, why did firms not exit?
    • Competitive pressures were heavily restricted
      • High import tariffs
      • No entry of firms by lack of external finance
      • Number of male family members
      • Lack of trust of professional managers (family owned businesses)
  • TFP in India is about 40% that of the USA, as per Caselli 2011
  • “Indian firms tend not to collect and analyze data systematically in their factories, they tend not to set and monitor clear targets for performance, and they do not explicitly link pay or promotion with performance. The scores for Brazil and China in the third panel, with an average of 2.67, are similar, suggesting that the management of Indian firms is broadly representative of large firms in emerging economies.”
  • The interventions comprised of improvements in:
    • Factory operations
    • Quality control
    • Inventory
    • Human Resource Management
    • Sales and order management
  • This was done by implementing the following steps:
    • A diagnostic phase
    • An implementation phase (this was for only the treatment group, obviously)
    • A measurement phase
  • The authors carefully consider whether the Hawthorne effect was at play, and reject the possibility.
  • ” In every firm in our sample, before the treatment, only members of the owning family had positions with any real decision-making power over finance, purchasing, operations, or employment. Non-family members were given only lower-level managerial positions with authority only over basic day-to-day activities. The principal reason seems to be that family members did not trust non-family members. For example, they were concerned if they let their plant managers procure yarn they may do so at inflated rates from friends and receive kickbacks.”
  • “A key reason for this inability to decentralize appears to be the weak rule of law in India. Even if directors found managers stealing, their ability to successfully prosecute them and recover the assets is likely minimal because of the inefficiency of Indian courts”
  • “Hence, the equilibrium appears to be that with Indian wage rates being extremely low, firms can survive with poor management practices. Because spans of control are constrained, productive firms are limited from expanding, so reallocation does not drive out badly run firms. Because entry is limited, new firms do not enter rapidly. The situation approximates a Melitz (2003)–style model with firms experiencing high decreasing returns to scale due to Lucas (1978) span of control constraints, high entry costs, and low initial productivity draws (because good management practices are not widespread).”
  • There are three reasons for inefficiency:
    • motivation problem
    • inspiration problem
    • perception problem
  • I need to read Lucas (1978) and Melitz (2003) next!

EC101: Links for 5th December, 2019

If you think of one’s opinion about RCT’s as a spectrum, I fall on the “I think it’s not a bad idea at all” part of it. How might I be wrong? Five articles that help me understand this.

  1. “Lately I find myself cringing at the question “what works in development?” I think it’s a mistake to think that way. That is why I now try hard not to talk in terms of “program evaluation”.“Does it work?” is how I approached at least two of the studies. One example: Would a few months of agricultural skills training coax a bunch of ex-combatants out of illegal gold mining, settle them in villages, and make it less likely they join the next mercenary movement that forms?

    But instead of asking, “does the program work?”, I should have asked, “How does the world work?” What we want is a reasonably accurate model of the world: why people or communities or institutions behave the way they do, and how they will respond to an incentive, or a constraint relieved. Randomized trials, designed right, can help move us to better models.”
    Chris Blattman on the issue. (Note that this was written in 2016)

  2. “In the early 2000s a group emerged arguing that important improvements to development and hence to human well-being could be achieved through the wide spread use of independent impact evaluations of development programs and projects using randomized control trial methods (RCT) of choosing randomly “treatment” and “control” individuals. I have been arguing, since about that time, that this argument for RCT in IIE gets one small thing right (that it is hard to recover methodologically sound estimates of project/program causal impact with non-experimental methods) but all the big things wrong.”
    You can’t write anything about RCT’s without writing about Lant Pritchett’s opinion about them.
  3. “Like other methods of investigation, they are often useful, and, like other methods, they have dangers and drawbacks. Methodological prejudice can only tie our hands. Context is always important, and we must adapt our methods to the problem at hand. It is not true that an RCT, when feasible, will always do better than an observational study. This should not be controversial, but my reading of the rhetoric in the literature suggests that the following statements might still make some uncomfortable, particularly the second: (a) RCTs are affected by the same problems of inference and estimation that economists have faced using other methods, and (b) no RCT can ever legitimately claim to have established causality.”
    Angus Deaton weighs in (and if you ask me, this is my favorite out of the five)
  4. “The economists, like the medical researchers, seem to have lost touch
    with their proper role. They are not ethically assigned to master our lives.
    The mastering assignment is what they assume when they focus on
    “policy,” understood as tricking or bribing or coercing people to do what’s
    best. It sounds fine, until you realize that it is what your mother did to you
    when you were 2 years old, and had properly stopped doing to you by the
    time you were 21. The field experimenters scorn adult liberty. And that is
    the other way many economists have lost touch. As noted by the
    economist William Easterly, another critic of the experimental work, and as
    argued at length by your reporter in numerous books, the real way to solve
    world poverty is liberty. Not dubious, fiddly, bossy little policies handed
    down from the elite. ”
    Dierdre McCloskey (as usual) doesn’t pull punches.
  5. A set of links about the topic from Oxfam.