A Theory of Succession in Family Firms

Succession is one of the most important issues for the most common type of firms. The literature on family firm succession has straggled as a part of different paradigms, setting forth stylized facts, informal arguments and observations. In this paper, we present a theory of family firm succession that unifies and synthesizes scattered and dispersed contributions depicted in family business research; specifically, the key role of the training activity in preparing the potential candidate, the importance of amenity potentials that is inherent to family businesses, the incumbent’s reluctance to step aside, the underperforming succession, the role of trust in the succession process, and the barriers to a “non-family” succession. Within a simple microeconomics framework, we find that these different facts and arguments spelt out in the literature are reflections of the same fundamental economic trade-off between proficiency (skills) and honesty (incentives) when choosing among potential successors.