Organizations and Markets

The Nature of the (Family) Firm

12 May 2006 at 12:28 pm Peter G. Klein 2 comments

| Peter Klein |

Brayden King at orgtheory.net has a nice post today about family-owned firms. He summarizes a recent sociology paper on the transformation of the Scottish [hooray!] shipbuilding industry from one of mostly family firms to one dominated by corporate firms. Writes Brayden: “Family businesses and corporations are clearly different creatures, but we [organizational scholars] usually just take the word of legal scholars in this matter. . . . My take-away is that, besides temporal continuity established through lines of heredity, the distinguishing feature of family firms is that affective relationships serves as the glue holding together various components of the business. This affect, which translates into close identification with the organization, is a distinctive competency of the family firm.”

I have a footnote. One industry, unlike virtually every other mature industry in the developed world, continues to be populated by small, family-owned firms: agriculture. Why? Public policy is surely part of the explanation, but not all. The best analysis of the puzzle, in my view, is the pioneering work by Doug Allen and Dean Lueck, appropriately (and wittily) titled “The Nature of the Farm” (article version here, book version here). They argue that family ownership results from agriculture’s unique combination of seasonality and random variation, which makes it difficult to design and enforce effective incentive contracts that mitigate moral hazard. Instead, sole proprietorships, with the farmer or farm family as residual claimant, outperform joint ownership arrangements, such as corporations.

I provide some further information on organizational characteristics of agriculture here.

Entry filed under: - Klein -, Food and Agriculture, Management Theory, Recommended Reading, Theory of the Firm.