Bossonomics? The economics of management and productivity.

AuthorBloom, Nick
PositionResearch Summaries

Management and Productivity

Economists have long speculated on why such astounding differences in productivity exist between firms and plants within countries, even within the same narrow sector. (1) While the popular press and business schools have long stressed the importance of different management practices, empirical economists have had relatively little to say about management. (2) A major problem has been the absence of high quality management data that is measured in a consistent way across firms and countries.

Despite this data constraint, heterogeneity in managerial and entrepreneurial ability has become the foundation for a wide range of literatures. (3) In many benchmark theories, it is assumed that management is an unobservable factor that varies across firms, driving productivity differences. In parallel, Mundlak labelled his fixed-effect differences in productivity as "unobserved managerial ability." (4)

Measuring Management using Double-Blind Surveys

To address this lack of management data, we have been developing a methodology for measuring management practices. (5) We use an interview-based evaluation tool that defines and scores from one ("worst practice") to five ("best practice") 18 basic management practices. This evaluation tool was developed by an international consulting firm, and scores these practices in three broad areas:

* Monitoring: how well do companies track what goes on inside their firms, and use this for continuous improvement?

* Target setting: do companies set the right targets, track the right outcomes, and take appropriate action if the two don't tally?

* Incentives: are companies promoting and rewarding employees based on performance, and systematically trying to hire and keep their best employees ?

To obtain accurate responses from firms, we interview production plant managers using a "double-blind" technique: managers are not told they are being scored or shown the scoring grid; they are only told they are being "interviewed about management practices for a research project." To run this blind scoring, we use open questions. For example, on the first monitoring question, we ask "tell me how you monitor your production process," rather than asking a closed question such as "do you monitor your production daily [yes/no]". We continue with open questions targeting actual practices and examples until the interviewer can make an accurate assessment of the firm's practices. For example, the second question on that performance tracking dimension is "what kinds of measures would you use to track performance?". The scoring grid for this performance tracking dimension is shown here as an example.

The other side of the double-blind technique is that interviewers are not told in advance anything about the firm's...

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