Introduction

Two central questions in economics are: (1) Why are there such astounding differences in material well-being across nations? and (2) What are the sources of economic growth? There is no shortage of theories on these questions in social science, the media, and the general public, but it has been only in the last decade or two that economists have been able to access the microeconomic and macroeconomic data sources to begin to adequately address these issues. We will argue that understanding the heterogeneity of productivity across firms is critical to explaining these macroeconomic questions of the level and changes of wealth across nations.

In this chapter, we document the importance of persistent productivity heterogeneity between firms and plants and argue that one of the proximate causes of these productivity differences is management practices. Organizational economics has made huge theoretical strides in the last two decades (e.g., Garicano and Prat 2010), but empirical evidence lags behind. We describe recent attempts to quantify management practices in a more rigorous manner using methodologies that lie between the traditional survey techniques in economics and the case-study approaches of business schools. These new data suggest an important role for management that mirrors many of the findings in the wider productivity literature.

We then discuss theoretical perspectives on management that address the central conundrum in the literature: If a particular management practice is profitable, then why do not all firms adopt it? We suggest that one reason is that management has a “technological aspect,” and we show how this links with many of the standard economic models of firm heterogeneity, such as Lucas (1978) and Melitz (2003).