Kinship and Capitalism: Evidence from Latin America

• In Event: Capitalism and Development in the Global South

Abstract

Why do Latin American economies fall behind? A large literature in social science claims than kinship is detrimental for institutional development and that the dissolution of kinship ties was crucial for Europe’s political development (Fukuyama, 2011; Weber 1978; Goody, 1983; Mitterauer, 2010). However, the relationship between kinship and economic development is less studied. Max Weber famously wrote that the development of capitalism in Europe required Protestantism to “shatter the fetters of the extended family”.

A pervasive feature of Latin American capitalism is the prevalence of family-based economic groups (Schneider, 2009; Schneider, 2013). This has proved an enduring characteristic, withstanding liberalization pressures in recent decades. Firm family ownership and control are considered to make Latin American capitalism more hierarchical, potentially hurting competitiveness and productivity.

In this paper we study two questions: (1) whether the introduction of more institutional forms of investment (e.g., private equity) can break kin-based control of firms and (2) whether firms with more institutionalized, as opposed to family-based, ownership and management display different political behavior. First, we use a large scale web-scraped novel dataset collected from the Brazil’s securities regulator containing all kinship ties at both the board of directors and top-management levels. We combine this dataset with financial and ownership information obtained from the prospectus of all initial public offerings (IPOs) since 2003 and document a negative relationship between the introduction of private equity investors and the prevalence of kinship ties within firms. Second, using administrative data on all individual and corporate-level campaign contributions, we examine the political behavior of firms with and without kinship ties in their board of directors and top management and study the link between the prevalence of kinship ties and political embeddedness. Moreover, we exploit as a natural experiment a recent change in the Brazilian electoral law that banned corporate campaign contributions (i.e. donations made directly by the firm)and examine its effect on the political behavior of different types of businesspeople and firms, in particular the substitution effect between corporate and individual donations.

This paper contributes to three strands of literature. First, the literature on the detrimental effect of kinship on institutional development (Banfield, 1958; Fukuyama, 2011; Weber 1978; Goody, 1983; Mitterauer, 2010). While a large body of work in social science claims than kinship is detrimental for institutional development, the relationship between kinship and capital is less studied –a gap we fill. Second, we contribute to the management literature, which emphasizes the impact of management practices on productivity and overall firm performance and growth (Bloom and Van Reenen, 2007; Bruhn et al., 2010; Bloom et al., 2013). We document the functioning of kinship as a particular mechanism behind management practices. Finally, we contribute to the literature on varieties of capitalism (Hall and Soskice, 2001). In a recent contribution, Schneider (2013) proposed that Latin America is characterized by a third variety of capitalism, Hierarchical Market Economies (HMEs). We provide detailed micro-level evidence on the functioning of one of the key properties of HMEs, the pervasiveness and persistence of kin-based business groups and its complementarities with the political system. More generally, by employing administrative data at the firm level, our paper contributes to a quantitative turn to this (generally qualitative) literature.

Authors

• Ignacio Puente, Massachusetts Institute of Technology

• Pablo Balan, Harvard University

• Diego Aparicio, Massachusetts Institute of Technology