Beyond COVID-19: How the manufacturing industry should prepare

No Line Left Behind: Assortative Matching Inside the Firm

FOCUS AREA

Improving Work Environment

LOCATION

Karnataka

REACH

xx

PARTNERS

Harvard Business School, University of Michigan

STAGE

DESIGN

EVALUATE

ANALYZE

DISSEMINATE

SCALE-UP

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How are teams determined within the firm? What team composition maximizes productivity, and what other concerns or constraints might intervene to determine team composition in practice? These questions regarding how production is organized within the firm are important to understand the determinants of firm productivity, and are at the core of organizational and personnel economics.

Challenge

Despite a great deal of theoretical work describing these types of firm decisions and their implications for productivity and growth, little empirical evidence exists regarding how teams are composed and why. This is due to stringent data requirements.

Design

This paper leverages high frequency data on changing team composition within a firm and the resulting productivity, to answer the posed questions. Specifically, we ask how do workers match to managers? That is, do the most talented managers match with the most productive workers? Or do good managers match with workers who are struggling to perform?

We characterize this sorting pattern in six factories of a large garment manufacturer in India. Workers in this firm are organized into production lines, each supervised by a manager. We exploit the high degree of worker mobility across lines, together with over three years of worker-level productivity data, to estimate the sorting of workers to managers. In addition, we collect a novel survey of production managers, and leverage data on the orders placed to this firm by large international buyers.

Findings

  • The estimates of our sorting model show that the firm implements negative assortative matching (NAM) - that is, better managers tend to match with worse workers, and vice versa. This stands in contrast to our estimates of the production technology, which reveal that if the firm were to positively sort, productivity would increase by between 1-4%.
  • The survey of managers reveals that managers are worried about meeting production deadlines with important buyers. Therefore, in order to avoid having lines fall behind, they move high productivity workers to low productivity lines, which then creates NAM. We consistently find that NAM is more pronounced in those factories where managers are most concerned about meeting deadlines with important buyers, and in those lines producing for large buyers.
  • These results show that NAM arises, at least in part, because the value of buyer relationships imposes minimum productivity constraints on each production line.

Conclusions

Our results highlight how trade frictions shape production decisions inside the firm. In particular, they emphasize that suppliers to the global market, concentrated in developing countries, may be beholden to a small set of powerful buyers from developed countries. As a result, they may be driven to “misallocate” managerial skill in service of these relationships, but at the expense of productivity.

Image credits: Nayantara Parikh



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