What's Different About Family Businesses?
34 Pages Posted: 16 Mar 1998
Date Written: September 1997
Family businesses make up 40 percent of the Fortune 500 companies, account for half the US GDP, and employ about half the labor force. The microeconomic literature has, for the most part, paid little attention to the family firm as an independent entity. This paper develops a theory of family business that brings the dynamics of the market forces and the family, as a non-market institution, under one rubric. The paper explores the tradeoffs the parent has to make as owner and manager in deciding on the compensation packages for his employees. The roles of trust, altruism, and family succession in affecting family members' behavior and firm survival are also analyzed. It is shown that the family business is fundamentally different from other businesses and families. For example, altruistic parents, in this context, may shift more risk to their children employed in the family business. In another case, guaranteed succession may induce higher effort from the child, which resolves the Samaritan's Dilemma. The paper shows that when firm loyalty is induced by allowing employees to become stakeholders and by fostering trust, then their effort is highest, but, at the same time, wages need not be performance based.
JEL Classification: D1, D64, D82, J3
Suggested Citation: Suggested Citation