and the National Bureau of Economic Research. We wish to thank two anonymous referees for

We provide a new rationale for pyramidal ownership in family business groups. A pyramid allows a family to access all retained earnings of a firm it already controls to set up a new firm, and to share the new firm’s nondiverted payoff with share-holders of the original firm. Our model is consistent with recent evidence of a small separation between ownership and control in some pyramids, and can differentiate between pyramids and dual-class shares, even when either method can achieve the same deviation from one share–one vote. Other predictions of the model are consistent with both systematic and anecdotal evidence. MANY FIRMS HAVE A CONTROLLING SHAREHOLDER, usually a family or the state (La Porta, Lopez-de-Silanes, and Shleifer (1999)). Moreover, in several countries, single individuals or families control a large number of firms. In such an orga-nization, typically referred to as a family business group, the top family often organizes the ownership of the group member firms in a pyramidal structure.1,2 That is, the family achieves control by a chain of ownership relations: The famil