Connectivity and Misallocation in Multi-unit Firms

We study the causal effect of reducing distance-related frictions with headquarters on branch outcomes in multi-unit firms in Brazil. Exploiting the introduction of new airline routes, we compare branches that gain a direct flight to their headquarters with otherwise similar branches in the same location that do not. In contrast to prior findings from high-income country settings, improved connectivity with headquarters lowers 12-month survival and, conditional on survival, reduces service and production employment. To interpret these results, we develop a model with three distance-dependent frictions: i) internal coordination costs of delivering headquarters inputs to branches, ii) client-service costs when serving markets without a local branch, and iii) a moral-hazard friction whereby distance amplifies local managers' incentives to over-hire. Consistent with the model's predictions, survival declines are larger at closer branches, while employment reductions are concentrated at more distant branches and in firms with lower headquarters bandwidth. The model clarifies how the impact of reduced frictions with headquarters depends on pre-existing distortions and reconciles heterogeneous connectivity effects observed across developing- and high-income contexts.