Management and Economic Performance

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Productivity, innovative capacity, and the ability to transition into new product spaces vary significantly across firms. These differences are central to understanding economic development and structural change, and this research focuses on one potentially important determinant: managerial capital. The context is post-war Japan, a setting that offers both a large-scale natural experiment and extremely rich data. During the occupation of Japan, Allied Forces implemented an "economic purge" of senior managers in large Japanese firms. Managers who had been employed at any time between 1937 and 1945 at firms with a net worth of over one hundred million yen were subjected to mandatory removal from their posts and barred from managerial positions in other large firms. They typically moved to firms in newer industries, which were not dominated by large conglomerates. The purge may have lowered economic performance by depriving Japan's large firms of scarce talent, or alternatively may have cleared the way for younger, innovative leaders to gain a foothold. It could have also promoted innovation by channeling talent into newer, rising industries, which tended to be exempt from the purge. However, if managerial capital is primarily embedded in organizational norms rather than in individuals, the purge may have had limited effects. This research estimates the impacts of the purge by comparing firms whose managers were purged to firms who barely avoided the purge by being just below the one hundred-million-yen cutoff. It also examines the performance of the firms to which purged managers moved. Finally, for those managers at branches that operated in colonial Taiwan, it examines whether ongoing connections with former Taiwanese employees helped these employees to subsequently transition into industries related to those of their former Japanese managers. Specifically, the investigators use a regression discontinuity design to estimate the impacts of the purge on the firms whose managers were removed and on the firms to which these managers moved. The latter requires constructing a control group consisting of firms to which managers just below the cutoff would have plausibly transitioned had they been purged. This can be done by using archival data to estimate a model of manager transitions that includes rich individual, firm, and network level characteristics. This research also exploits the same plausibly exogenous variation to test whether managerial connections helped Taiwanese entrepreneurs to also transition into these industries.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.