The role of the manager in promoting production is a little-understood phenomenon. In particular, it is difficult to separate managers' contributions from the abilities of the workers they supervise. Firms may therefore mistakenly attribute the contributions of the workers to the managers who happen to oversee them. With its plethora of performance data, the National Basketball Association (NBA) provides a natural setting to measure the contribution of a head coach to the performance of his team. We find that some highly regarded coaches deserve their accolades, but several coaches owe their success to managing highly talented teams. Conversely, some coaches with mediocre records have made significant contributions to the performance of their players. Most coaches, however, do not have a statistically significant impact on their players or their teams, making them nothing more than the "principal clerks" that Adam Smith called managers over 200 years ago.
Keywords: coaching efficiency, National Basketball Association, productivity
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Introduction: The Role of Managers
The reputation of corporate managers goes through periodic upswings and downturns. As noted by Ira Horowitz (1994b), Adam Smith argued managers play an inconsequential role in the performance of a firm. Specifically, Smith separated the role of the entrepreneur from that of the manager. In Smith's view, entrepreneurs provide both the fundamental ideas and capital the organization requires for success. Beneath the entrepreneur is a group of subordinates that oversees daily operations. From Smith's perspective, this group of subordinates does not vary in any significant way from organization to organization. In essence, the managers of daily operations are little more than "principal clerks" (Smith, 1976, pp. 54-55). This view of managers has persisted in the neoclassical model of the firm in which "top managers are homogeneous inputs into the production process" (Bertrand & Schoar, 2003, p. 1173).
With its emphasis on static equilibrium, neoclassical theory assumes away any role for managers. In this setting, managers ensure firms operate in a technically and economically efficient manner. That is, they extract maximal output from a given set of inputs and minimize the cost of a given level of output. For a given set of inputs, a given technology, and given prices, all managers behave in exactly the same manner.
In contrast to neoclassical economics, the popular press has often regarded corporate managers, particularly CEOs, with an almost cult-like devotion. A search of Amazon.com's website showed almost 4,000 entries for Jack Welch, of which about 25 were either books by him or books whose title featured his name. These works almost uniformly praised Welch for his leadership of GE. The contrast between economic theory and popular wisdom reveals a flaw that economists have only recently begun to address. By focusing on equilibrium, the neoclassical model overlooks the key role of managers: to seek out and exploit disequilibria.
The most successful managers take advantage of market inefficiencies or find previously undiscovered niches. Such managers thus take on some of the characteristics of entrepreneurs. Unlike entrepreneurs, however, they work to redirect the inputs of existing companies rather than create new products or firms. Jack Welch, for example, did not create any new financial services.He did, however, transform GE by shifting its focus from manufacturing to financial services at a time when manufacturing was beginning to decline and the financial services sector was expanding.
Economic studies of managers have begun to recognize this role of managers and have sought to quantify their impact on the firms they head. The studies generally find that managers have a strong impact on firm policy and profitability. However, these …