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Family first? Nepotism and corporate investment

Author

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  • Gianpaolo Parise
  • Fabrizio Leone

Abstract

Nepotism emerges in a multiplicity of contexts from political assignments to firm hiring decisions, but what are its real effects on the economy? This paper explores how nepotism affects corporate investment. To measure nepotism, we build a unique dataset of family connections among individuals employed in strategic positions by the same firm. We address endogeneity concerns by exploiting the heterogeneity in ancestries across U.S. counties to construct a measure of inherited family values. We find that firms headquartered in counties where locals inherited strong family values exhibit more nepotism. Using this measure and the percentage of family households in the county as instrumental variables, we provide evidence that nepotism hinders investment. Overall, our results suggest that underinvestment in these firms is driven by both lower quality of hired workers and lower incentive to exert effort.

Suggested Citation

  • Gianpaolo Parise & Fabrizio Leone, 2018. "Family first? Nepotism and corporate investment," BIS Working Papers 693, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:693
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    References listed on IDEAS

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    1. Perez-Alvarez, Marcello & Strulik, Holger, 2021. "Nepotism, human capital and economic development," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 211-240.
    2. Sheheryar Banuri & Catherine Eckel & Rick K. Wilson, 2022. "Does cronyism pay? Costly ingroup favoritism in the lab," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1092-1110, July.

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    More about this item

    Keywords

    nepotism; investment; moral hazard; hiring practices; family ties;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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