Why do firms choose to be inefficient?

By Nicholas Decker @ 2024-09-06T03:09 (+4)

This is a linkpost to https://nicholasdecker.substack.com/p/why-do-firms-choose-to-be-inefficient

Firms, it seems, leave massive potential profits on the table through poor management practices. Spreading information on how to better run a firm may be a low cost way of greatly improving productivity.

Karthik Tadepalli @ 2024-09-07T14:06 (+2)

One thing I've never seen people who are bullish on management interventions talk about (including myself) is why the corresponding interventions for microenterprises are so much less effective. (McKenzie 2014, McKenzie 2020) Microenterprises and self employed entrepreneurs also don't do simple business practices like "keep accounts", but even heavy-touch interventions pushing them to do that have zero to small effects. What's going on?

t6aguirre @ 2024-09-07T22:03 (+3)

My guess is that the gains from professional management practices are generally much more limited for micro enterprises or self-employed individuals because: 1) there is less internal friction. If it's just you, it’s easier to monitor money inflow and outflow even without bookkeeping. This changes significantly when you have around 15 people; and 2) there are fewer economies of scale to achieve. I'd guess the ideal future envisioned by small companies, like those with 15 people, is to grow into a 100-person company, with much more business and new locations. For a self-employed person, the best scenario [as seen by themselves] seems to be to keep the business running, increase some profit but not change things much, or find a new job. Since many professional management practices seem to be somewhat of a fixed cost, there is little incentive for them to adopt these practices if they don't see growth as their default path to success. I think Duflo and Banerjee wrote a bit about this in their work on microcredit for small companies, but I'm doing guesswork here haha