Does doing badly encourage management innovation?

In this paper we have undertaken an empirical analysis of the notion that f irms introduce managerial innovations as a consequence of bad times, as in the 'pit-stop' view of recessions, We first analyze a dynamic model of the firm and conclude that a competitive firm operating in a perfect capital ma rket may well devote more of its employees' time to reorganization and othe r productivity improving activities during periods where the real output pr ice or productivity is declining (e.g. recessions). We then investigate the hypothesis that a worsening of the firm's situation will lead to the intro duction of productivity improving innovations of various kinds. Our individ ual company data tend to confirm this hypothesis with the single exception that firms tend to become more centralized when their real or financial pos ition declines, despite the general view that it is decentralization which tends to improve the operation of a company in the long run.