How important is the quality of a CEO to a company's performance over time? How important is the quality of a leader to a country's performance over time? These questions seem quite straightforward to answer, but in reality they are quite tricky. First, it is difficult to measure the 'quality' of a CEO or a leader. Second, the appointment of a CEO or a leader is not a random event - typically it is the result of a deliberative process, and may depend on the company's or country's past or expected future performance.
What is needed is some CEOs or leaders who differ in 'quality' and who are randomly appointed to the role. This sort of experiment is, of course, not available in the real world. However, a 2025 article by Sebastian Ottinger (SERGE-EI) and Nico Voigtländer (UCLA), published in the journal Econometrica (open access), examines a setting that mimics the ideal experiment in many respects. Ottinger and Voigtländer look at 399 European monarchs from 13 states over the period 1000-1800 CE. To address the two concerns above (measurement of quality and non-random appointment), they:
...exploit two salient features of ruling dynasties: first, hereditary succession—the predetermined appointment of offspring of the prior ruler, independent of their ability; second, variation in ruler ability due to the widespread inbreeding of dynasties.
Ottinger and Voigtländer measure the 'quality' of a ruling monarch using the work of Frederick Adams Woods, who:
...coded rulers’ cognitive capability based on reference works and state-specific historical accounts.
Ottinger and Voigtländer measure the outcome variable, state performance, as a subjective measure from the work of Woods, as well as the change in land area during each monarch's reign, and the change in urban population during each monarch's reign. They then use a measure of the 'coefficient of inbreeding' for each ruler as an instrument for cognitive ability. This is important, because the instrumental variables (IV) approach they employ reduces the impact of any measurement error in cognitive ability, as well as dealing with the endogenous selection of rulers. However, as always with the IV approach, the key identifying assumption is that inbreeding affects the outcome (state performance) only through its effect on ruler cognitive ability (not, say, through the instability of succession). Ottinger and Voigtländer provide a detailed discussion in favour of the validity of the instrument, and support this by showing that the results hold when they instead use 'hidden inbreeding' (inbreeding that is less direct than, say, parents being first cousins or an uncle and niece) as an instrument.
Now, in their main instrumental variables analysis, they find:
...a sizeable effect of (instrumented) ruler ability on all three dimensions of state performance. A one-std increase in ruler ability leads to a 0.8 std higher broad State Performance, to an expansion in territory by 16%, and to an increase in urban population by 14%.
Ottinger and Voigtländer also explore the mechanisms explaining this effect, finding that:
...less inbred, capable rulers tended to improve their states’ finances, commerce, law and order, and general living conditions. They also reduced involvement in international wars, but when they did, won a larger proportion of battles, leading to an expansion of their territory into urbanized areas. This suggests that capable rulers chose conflicts “wisely,” resulting in expansions into valuable, densely populated territories.
Finally, Ottinger and Voigtländer looked at whether a country's institutions mattered for the effect of the ruler's cognitive ability on state performance. They measure how constrained a ruler was, such as by the power of parliament, and using this measure in their analysis they find that:
...inbreeding and ability of unconstrained leaders had a strong effect on state borders and urban population in their reign, while the of constrained rulers (those who faced “substantial limitations on their authority”) made almost no difference.
That result is further support that the cognitive ability of rulers mattered precisely in those situations where a ruler might be expected to have an effect - that is, when they are unconstrained by political institutions. When the ruler is constrained by parliament or other political institutions, their cognitive ability will likely have much less effect on state performance, and that is what Ottinger and Voigtländer found.
One surprising finding from the paper appears in the supplementary materials, where Ottinger and Voigtländer report that the marginal effect of cognitive ability on state performance doesn't vary by gender. That surprises me a little given that earlier research by Dube and Harish (which Ottinger and Voigtländer cite in a footnote) found that queens were more likely to engage in wars than kings (see here). Now, this paper shows that more able rulers fight fewer wars. So, I would have expected that queens, having fought more wars, would show a different relationship between cognitive ability and state performance, but that didn't prove to be the case. Perhaps that tells us that, while queens may have fought more wars, they made better choices about which wars to fight? Or perhaps, they fought more wars but that only affected the level of wars, and not the interaction between cognitive ability and wars (or cognitive ability and state performance)?
Regardless, overall these results tell us that the 'quality' of a leader really does matter. A higher quality ruler, in terms of cognitive ability, improves state performance. Extending from those results, we might expect that a higher quality CEO also improves company performance. Of course, CEO selection isn’t hereditary and differs in important ways, but the broader lesson that leader quality can matter a lot when leaders have discretion likely holds in that setting as well.
[HT: Marginal Revolution, early last year]
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