management from the smaller sample of the WMS. This unique database enables us to establish a set of new stylized facts concerning the sorting of firms across management modes according to firm, regional and national characteristics.<sup>7</sup> Importantly, by working at the subnational level, we are able to purge national characteristics that may be correlated with institutions or trust.

Second, to discipline the empirical analysis, we develop a simple model of an industry equilibrium in the spirit of Melitz (2003) in which heterogeneous firms decide between family and professional management when the latter are subject to contracting frictions. Motivated by the findings in Bloom et. al. (2013), we assume that due to span-of-control limitations entrepreneurs can increase productivity by delegating managerial tasks to professional managers. The cost of this delegation is that outside managers may not act in firms’ interests, and the quality of legal institutions or enforcing social norms determine the ability of owners to recoup costs in this event. Hence, when contracting institutions are weak, fewer firms adopt the more productive professional management mode. Aggregate total factor productivity (TFP) then falls as the most productive firms remain suboptimally small, intermediate-sized firms sort into less productive family management, and the least productive firms survive due to the resulting decrease in competition.

Our framework is closely related to Burkart, Panunzi and Shleifer (2003) who develop a model where a founder chooses between his or her heir and a more productive professional manager, and characterize how this decision is shaped by the legal environment. In contrast, we incorporate heterogeneity in firm productivity within a general equilibrium setting. This allows us to characterize how these choices might affect firms differentially across the size distribution (which we find support for in the data) as well as the aggregate effects on TFP. These results are important since they imply that only the behavior of certain types of firms is distorted by weak contracting institutions through the family management channel. Our model also relates to Caselli and Gennaioli (2013) and Akcigit, Alp and Peters (2016) who calibrate dynamic models of family management induced by a weak contracting environment. While our model is also general equilibrium, equilibrium can be solved in closed form which allows us to parsimoniously derive predictions characterizing the sorting of firms across management modes and the effects of contracting institutions on firms’ managerial choices. The model also yields a simple and intuitive sufficient statistic for aggregate productivity that depends on the share of professionally-managed firms in the economy.

Third, we show that the patterns in the data are consistent with the predictions of the model to show how contractual institutions relate to the incidence of family firms and aggregate performance. In contrast to the existing literature that examines cross-country correlations between family firms and legal institutions (e.g. La Porta, Lopez-de-Silanes and Shleifer 1999, Burkart, Panunzi and Shleifer 2003, Aminadav and Papaioannou 2018), we are able to leverage our large sample size to examine how management modes respond to changes in proxies for the contractual environment across regions within countries. Given the lack of sub-national measures of rule of law or contracting institutions, our analysis centers on using withincountry variation of the World Values Survey measure of trust as a measure of enforcement of social norms

> 7In parallel work, Aminadav and Papaioannou (2018) draw on Orbis to generate data on 40,000 listed firms in 127 countries and explore determinants of a wide variety of types of corporate control in listed firms in 127 countries. This enables them to to trace controlling shareholders from the often obscure corporate structures and identify large differences in types of corporate control across and within continents and correlate these structures with legal traditions. Our paper differs in its focus on family management, using regional variation in trust to examine the effects of institutions on firm management choices, and drawing out the implications of these effects on aggregate productivity through the lens of our model.

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