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Title: "Self-Employment within the Firm"
With Vittorio Bassi, Jung H. Lee , Alessandra Peter, Ritwika Senand Esau Tugum
We show that barriers to within-firm labor specialization are an important driver of the small size and low productivity of manufacturing firms in Uganda. We develop an equilibrium model of occupational choice and firm size in which firm productivity depends on the ability of both the entrepreneur and the employees assigned to key tasks. Task assignment within the firm is modulated by a delegation cost. When this cost is low, entrepreneurs can specialize on the most complex tasks, thereby leverage their talent and optimally run large firms. When the delegation cost is large, the internal organization of the firm resembles self-employment and there are low returns from hiring additional workers. Motivated by the model, we collected data on employees' and owners' time allocation within Ugandan manufacturing firms. We document limited specialization of labor, consistent with large delegation costs. We then exploit heterogeneity across sectors to suggest that product customization provides one source of delegation costs and to validate the model predictions on the joint relationship between specialization, size, and returns to managerial ability. Finally, we estimate the model to quantify the role of limited specialization. We find that the current equilibrium closely resembles the extreme case of self-employment within the firm. Our estimates imply that the internal allocation of talent is a key constraint to firm size, as important as technological decreasing returns or other external frictions. As a result, reducing delegation costs would substantially increase average firm size and aggregate productivity, while policies aiming to reduce other external frictions have muted effects.
Please contact Alejandro Estefan for information.