Blood and Money : Kin Altruism, Governance, and Inheritance in the Family Firm

Using the inclusive fitness framework (Hamilton, 1964), this paper models family firms. The structure on altruism imposed by the inclusive fitness framework ensures that increasing kinship reduces monitoring efficiency. Nevertheless, when incentive alignment determines management compensation, increasing kinship increases net efficiency. At the same time, increasing kinship promotes nepotistic hiring, and when institutions are weak, may not increase firm value. When labor markets determine compensation, increasing kinship lowers efficiency, but never induces nepotism, and sometimes increases firm value. Family firm founders are always more altruistic toward related managers than their direct descendants, leading to intergenerational conflicts over compensation and hiring policies