Another link between equity and efficiency

I’ve written frequently on Troppo about the many ways in which equity and efficiency are friends, rather than enemies, although of course it depends on context. There are some ways and circumstances in which the two are in tension with one another. In any event, here’s a fascinating paper – in which researchers went in search for a link between social capital – as measured by trust – and the degree of decentralisation in organisations. And found it. I think of the former, trust as being associated with equity and the latter as being associated with efficiency. And all – trust, equity, decentralisation and efficiency – are also associated with wellbeing.

The Organization of Firms Across Countries
Nicholas Bloom, Raffaella Sadun and John Van Reenen

We argue that social capital as proxied by trust increases aggregate productivity by affecting the organization of firms. To do this we collect new data on the decentralization of investment, hiring, production, and sales decisions from corporate headquarters to local plant managers in almost 4,000 firms in the United States, Europe, and Asia. We find that firms headquartered in high-trust regions are significantly more likely to decentralize. To help identify causal effects, we look within multinational firms and show that higher levels of bilateral trust between the multinational’s country of origin and subsidiary’s country of location increases decentralization, even after instrumenting trust using religious similarities between the countries. Finally, we show evidence suggesting that trust raises aggregate productivity by facilitating reallocation between firms and allowing more efficient firms to grow, as CEOs can decentralize more decisions.

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