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Prediction Ability

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  • Katsuya Takii

    (University of Essex)

Abstract

This paper models managerial human capital as the ability to predict future events. My assignment model shows that a manager who has high prediction ability goes into a risky industry, because risk increases the marginal productivity of prediction ability. This conclusion contrasts with that of Lucas (1978). In Lucas's model talented managers simply manage bigger firms. The data supports my view: talented B-school graduates choose to work in risky industries, and the correlation between an ability measure and a risk measure is 0.75. The simulated assignment model fits B-school placement data quite well, and a 1 percent increase in the GMAT score of a B-school graduate implies a 158 percent increase in the risk of the firm to which the graduate is assigned. I also employ a dynamic analysis, which shows that prediction ability increases a firm's expected Tobin's Q and allows a firm to attain a higher expected growth rate. The COMPUSTAT dataset confirms these points as well.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1411.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1411

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References

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  1. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  2. Katsuya Takii, 2000. "Prediction Ability," Econometric Society World Congress 2000 Contributed Papers 1411, Econometric Society.
  3. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
  4. Ann P. Bartel & Nachum Sicherman, 1997. "Technological Change and Wages: An Inter-Industry Analysis," NBER Working Papers 5941, National Bureau of Economic Research, Inc.
  5. repec:att:wimass:8827 is not listed on IDEAS
  6. Gretsky, Neil E. & Ostroy, Joseph M. & Zame, William R., 1999. "Perfect Competition in the Continuous Assignment Model," Journal of Economic Theory, Elsevier, vol. 88(1), pages 60-118, September.
  7. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  8. Demers, Michel, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information over Time," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 333-50, April.
  9. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  10. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  11. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Katsuya Takii, 2004. "Prediction Ability and Investment under Uncertainty," Industrial Organization 0406005, EconWPA.
  13. Kihlstrom, Richard E, 1974. "A Bayesian Model of Demand for Information About Product Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 99-118, February.
  14. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Schultz, Theodore W, 1975. "The Value of the Ability to Deal with Disequilibria," Journal of Economic Literature, American Economic Association, vol. 13(3), pages 827-46, September.
  16. Holmes, Thomas J & Schmitz, James A, Jr, 1990. "A Theory of Entrepreneurship and Its Application to the Study of Business Transfers," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 265-94, April.
  17. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  18. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 147-71, April.
  19. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  20. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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Citations

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Cited by:
  1. Katsuya Takii, 2003. "Prediction Ability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 80-98, January.
  2. Katsuya Takii, 2004. "The Value of Adaptability," Industrial Organization 0406004, EconWPA.
  3. Katsuya Takii, 2000. "Prediction ability and investment under uncertainty," Economics Discussion Papers 518, University of Essex, Department of Economics.
  4. Takanori Adachi & Takao Asano, 2011. "Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints," KIER Working Papers 803, Kyoto University, Institute of Economic Research.
  5. Li, Fei & Ueda, Masako, 2005. "CEO-Firm Match and Principal-Agent Problem," CEPR Discussion Papers 5119, C.E.P.R. Discussion Papers.
  6. Katsuya Takii, 2008. "The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms in a Rapidly Changing Environment," OSIPP Discussion Paper 08E003, Osaka School of International Public Policy, Osaka University.
  7. Katsuya Takii, 2004. "Entrepreneurial Efficiency: An Empirical Framework and Evidence," Macroeconomics 0411006, EconWPA.
  8. Larrisa V. Shavinina, 2011. "What Do We Know About Managerial Talent? The Case-Study of Richard Branson as a Great Project Manager," RePAd Working Paper Series UQO-DSA-wp2102011, D├ępartement des sciences administratives, UQO.
  9. Katsuya Takii, 2007. "The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms," Discussion Papers in Economics and Business 07-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  10. Katsuya Takii, 2004. "Fiscal Policy and Entrepreneurship," Macroeconomics 0406006, EconWPA.
  11. Sasaki, Masaru & Takii, Katsuya & Wan, Junmin, 2012. "Horizontal Transfer and Promotion: New Evidence and an Interpretation from the Perspective of Task-Specific Human Capital," IZA Discussion Papers 6486, Institute for the Study of Labor (IZA).
  12. Katsuya Takii, 2004. "Entrepreneurial Efficiency: Theory," Macroeconomics 0411005, EconWPA.
  13. Katsuya Takii, 2009. "Entrepreneurial competition and its impact on the aggregate economy," Journal of Economics, Springer, vol. 97(1), pages 1-18, May.
  14. Katsuya Takii, 2004. "Entrepreneurial Efficiency," Macroeconomics 0406007, EconWPA.

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