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The Difference That CEOs Make: An Assignment Model Approach

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Author Info
Marko Tervio

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Abstract

This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in firm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value.

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File URL: http://hdl.handle.net/10.1257/aer.98.3.642
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=3&article=5&issue_date=June2008
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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 3 (June)
Pages: 642-68
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Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:642-68

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  1. Carola Frydman & Raven E. Saks, 2008. "Executive Compensation: A New View from a Long-Term Perspective, 1936-2005," NBER Working Papers 14145, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Arantxa Jarque, 2008. "CEO compensation : trends, market changes, and regulation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 265-300. [Downloadable!]
  4. Fabienne Llense, 2008. "French CEO Compensations: What is the Cost of a Mandatory Upper Limit?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Dupuy, Arnaud, 2008. "The Assignment of Workers to Tasks, Wage Distribution and Technical Change: A Critical Review," IZA Discussion Papers 3379, Institute for the Study of Labor (IZA). [Downloadable!]
  6. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2009. "Matching Firms, Managers and Incentives," Economics Working Papers ECO2009/14, European University Institute. [Downloadable!]
    Other versions:
  7. Erzo G.J. Luttmer, 2007. "On the Mechanics of Firm Growth," Working Papers 2007-4, University of Minnesota, Department of Economics, revised 10 2007. [Downloadable!]
  8. Alex Edmans & Xavier Gabaix & Augustin Landier, 2007. "A Calibratable Model of Optimal CEO Incentives in Market Equilibrium," NBER Working Papers 13372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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