- Corporate governance •
- Entrepreneurship •
- kin altruism •
- contract theory
This paper develops a theory of governance and inheritance within family firms based on kin altruism (Hamilton, 1964). Family members weigh the payoffs to relatives in proportion to relatedness. The theory shows that family management entails both costs and benefits. The attenuated monitoring incentives associated with kin altruism produce a ?policing problem? within family firms.
This policing problem results in both increased managerial diversion and increased monitoring costs. Relatedness has conflicting effects on manager?owner compensation negotiations. On the one hand, owners are more willing to concede rents to family managers to increase total value. On the other hand, because family managers internalize the costs to the family from their rejection of owner demands, relatedness lowers managers? reservation compensation level. Lower compensation leads to more diversion and costly monitoring. Firm founders anticipate the costs and benefits family control when designing their bequests. For typical family trees, kin altruism ensures that founders? preferences are much more closely aligned with value maximization than those of any of their descendants?. Thus, founder bequests are designed to weaken closer relatives? bargaining power in posthumous negotiations with more competent distant relatives.