In the Wrong Hands: Complementarities, Resource Allocation, and TFP

Abstract

I explore mismatch between firms and their managers as a source of variation in aggregate output and total factor productivity (TFP). The model is calibrated to match observations on the size distribution of US manufacturing firms, managerial compensation, and aggregate moments in the national accounts. Quantitatively, small deviations from assortative matching can have sizeable effects on output and TFP. "Cronyism," where managerial positions are allocated by status rather than talent, imposes a substantial burden on economic welfare. Moreover, the model can reconcile the seemingly contradictory evidence from numerous case studies with results from recent contributions to the assignment literature. (JEL D24, E23, L11, L60, M52, O40)O ne of the most striking facts in macroeconomics is the variation of income per capita across countries. Recent work suggests that the lion's share in these differences can be explained by cross-country variations in total factor productivity (TFP) rather than variations in human and physical capital accumulation. 1 Building on work by Restuccia and Rogerson (2008) and Hsieh and Klenow (2009), a recent literature emphasizes misallocation as a potential explanation for low TFP. The aim of this paper is to quantitatively explore one particular form of misallocation, namely mismatch between the attributes of projects and the people who run them, as a source of aggregate productivity losses.To explore this question I embed the assignment problem of Terviö (2008) into an otherwise standard Lucas span-of-control model. The economy is populated by heterogeneous managers and projects, and a firm consists of a matched manager-project 1 Recent contributions to this literature include, among many others: Klenow and

CEO Behavior and Firm Performance

“…Overall, the evidence presented in this section is consistent with the presence of significant di↵erences in managerial assignment frictions across countries. These findings are complementary to Alder (2016), who develops a similar idea in the context of a calibrated macro model and finds deviations from assortative matching to have large e↵ects on output and TFP across countries.…”

Does Size Matter?—The Effect of Size of Production Workers, Management Staff and Proprietors on Productivity

“…Similarly, Ilmakunnas et al [20], Sharma et al [21], Baltagi et al [22] observed positive externalities of production workers and their characteristics to productivity, however Unel [23] and Alder [24] could not observed the said relationships. In the same line and with respect to ownership, the findings observed by Curcio [25] and Baltagi et al [22] contradicted each other.…”

What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?

“…In contrast to Chang et al (2010) and Taylor (2013), this study uses stock price reactions to sudden deaths to examine whether executives are paid for their contribution to shareholder value; it then uses this relationship to elicit an estimate of how rent is shared between executives and shareholders. The main advantages of our experiment are that deaths are exogenous, unlike the turnover events in Chang et al (2010), and that our method does not require the strong assumptions of a structural model, as do the models of Gabaix and Landier (2008), Terviö (2008), Alder (2012), and Taylor (2013).…”

“…Terviö (2008) finds that CEOs capture roughly 20% of the value they add to their firms. Alder (2012) relaxes the Gabaix and Landier (2008) assumption of a unity elasticity of substitution between firm quality and executive ability, and finds that CEOs might capture greater rent than the amount that Gabaix and Landier (2008) and Terviö (2008) suggest. In contrast, Taylor (2013) uses a structural model and finds that the surplus from learning is split equally between the executive and shareholders when news about CEO ability is good, and that the CEO completely avoids the negative surplus resulting from bad news.…”

“…First, it joins a growing literature that addresses the challenging question of whether and how rent from the firmmanager relationship is shared between executives and shareholders (Gabaix and Landier 2008, Terviö 2008, Alder 2012, and Taylor 2013. These studies find varying results.…”