by 7.9% and that moving from the minimum to the maximum rule of law countries (which, in our sample, is from Russia to Norway) increases TFP by 21.6%. Our findings therefore highlight a quantitatively important channel through which institutional differences drive productivity differences across countries and regions.

The main drawback of our study is the lack of exogenous variation in (proxies for) the quality of contracting institutions. While we perform an exercise using historical institutions as a potential exogenous driver of contemporary trust as in Tabellini (2010) (described below), in general it is a challenge throughout the literature to find an instrument for trust that is is wholly uncorrelated with regional unobservables. Nevertheless, we believe our results advance the literature by providing new empirical patterns that control for country-level unobservables and region characteristics. Indeed, our cross-country estimates are twice as large in the absence of these controls. More broadly, since the patterns borne out in the data are consistent with our model’s multiple predictions, they support its narrative that legal institutions lower aggregate performance by causing more firms to sort into less productive family management.

There are several other limitations which we address through robustness checks. First, we lack a measure of legal institutions at the region level. In support of using trust as a proxy, we show that it is highly correlated with measures of the rule of law (from the Worldwide Governance Indicators) and contract enforcement (from the World Bank Doing Business Survey) across countries. Second, since there are a number of ways to define family management we show our results are robust to a variety of alternatives. Third, we address the difficulty in measuring the operating location of multi-plant firms by showing the results hold on a sample of smaller firms who are less likely to operate multiple establishments. Fourth, we re-run our main specifications under a number of alternative sampling rules to show the way in which we construct our main sample does not drive our results. Fifth, we show our results hold if we measure firm size by assets rather than employees. Sixth, we document the reduced form relationship between family management and a measure of early historical political institutions from Acemoglu, Johnson, and Robinson (2002) used in Tabellini (2010) to instrument for measures of culture and trust. We believe this provides one more piece of evidence that the patterns we document in the data are not merely spurious.

The rest of the paper is structured as follows. Section 2 outlines the model and derives its main predictions. Section 3 describes the various data sources and how the variables are constructed. Section 4 presents empirical results, both cross-country evidence as well as within-country regressions which exploit subnational variation in our proxy for contractual institutions. These results are followed by robustness checks. Section 5 concludes and discusses the implications of our findings.

# II. A STYLIZED MODEL OF MANAGERIAL CHOICE

To guide our empirical analysis, we develop a stylized model of the sorting of heterogeneous firms between management modes in the presence of contracting frictions. Our framework is based on the models of industry equilibrium developed by Hopenhayn (1992) and Melitz (2003). In contrast to the application of these models in the trade literature, where the main choice made by firms is over whether or not to export, we concentrate on the choice over management modes (i.e. between family and professional management). While hiring professional managers makes firms more productive, reflecting the fact that delegating management 5