Love, marriage and firms

Cite this Article
Larry Ribstein, Love, marriage and firms, Truth on the Market (September 17, 2010),

I’ve been working on the relationship between family law and business associations. My current paper, discussed here, shows why business association standard forms may be inappropriate for domestic relationships.

Another question regarding the relationship between families and firms concerns the extent to which the family is a substitute for the firm as a business organization structures. Conventional wisdom is that families help supply the trust that may be lacking elsewhere in a culture or economy. I noted in my Rise of the Uncorporation:

As Kerim Bey told James Bond in From Russia with Love, “All of my key employees are my sons. Blood is the best security in this business.” Before the development of modern technologies for controlling agency costs, all business was as dangerous as Bey’s spy business and the family was the only feasible way to bind agents. The Roman societas were more like Mafia families than modern partnerships. Partnerships evolved from families to firms in response to the globalization of trade and development of more sophisticated contracts and business technology.

This suggests that whether families serve as firms depends on the local business technology. But might it also depend on local family technology? This is the insight in Mehotra, Morck, Shim and Wiwattanakantang’s recently posted Must Love Kill the Family Firm. Here’s the abstract:

Family firms depend on a succession of capable heirs to stay afloat. If talent and IQ are inherited, this problem is mitigated. If, however, progeny talent and IQ display mean reversion (or worse), family firms are eventually doomed. This is the essence of the critique of family firms in Burkart, Panunzi and Shleifer (2003). Since family firms persist, solutions to this succession problem must exist. We submit that marriage can transfuse outside talent and reinvigorate family firms. This implies that changes to the institution of marriage, notably, a decline in arranged marriages in favor of marriages for “love” bode ill for the survival of family firms. Consistent with this, the predominance of family firms correlates strongly across countries with plausible proxies for arranged marriage norms. Interestingly, family firm dominance interacted with arranged marriage norms also correlates with lower GDP per capita, suggesting that cultural inertia may also impede convergence to more efficient economic organization.

In other words, arranged marriages, and proxies such as the Japanese practice of adopting adult heirs, help families run firms, and are themselves products of other factors in the culture.

The authors conclude that “[h]ow arranged marriages affect corporate governance, corporate strategies, corporate organization, and other central questions about the organization of economic activity remains largely unexplored . . .”