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Reaching for the Stars: Who Pays for Talent in Innovative Industries?

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  • Fredrik Andersson
  • Matthew Freedman
  • John C. Haltiwanger
  • Julia Lane
  • Kathryn L. Shaw

Abstract

Innovation in the U.S. economy is about employing and rewarding highly talented workers to produce new products. Using unique longitudinal matched employer-employee data, this paper makes a key connection between talent and firms in markets with risky product innovations. We show that software firms that operate in product markets with highly skewed returns to innovation, or high variance payoffs, are more likely to attract and pay for star workers. Thus, firms in high variance product markets pay more up-front—in starting salaries—to attract and motivate star employees, because if these star workers produce home-run innovations, the firm’s winnings will be huge. However, we also find these same firms pay highly for loyalty: star workers that stay with a firm have much higher earnings in firms with high variance product market payoffs. The large effects on earnings are robust to the inclusion of a wide range of controls for both workers and firm characteristics. One key control is that we also show that in firms that have actually hit home runs, with high revenues, the rewards for star talent are even greater. We also find that the dispersion of earnings is higher within firms with high variance product payoffs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12435.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12435

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Cited by:
  1. Lewis Evans & Graeme Guthrie & Neil Quigley, 2012. "Contemporary Microeconomic Foundations for the Structure and Management of the Public Sector," Treasury Working Paper Series 12/01, New Zealand Treasury.
  2. Edward P. Lazear & Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 91-114, Fall.
  3. B. Atrostic, 2008. "Measuring U.S. innovative activity: business data at the U.S. Census Bureau," The Journal of Technology Transfer, Springer, vol. 33(2), pages 153-171, April.
  4. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  5. Alex Bryson & Simmons, R. & Rossi, G., 2012. "Why Are Migrants Paid More?," NIESR Discussion Papers 388, National Institute of Economic and Social Research.
  6. Leonard I. Nakamura, 2009. "Intangible assets and national income accounting: measuring a scientific revolution," Working Papers 09-11, Federal Reserve Bank of Philadelphia.
  7. N. Lacetera & L. Zirulia, 2008. "Knowledge Spillovers, Competition, and R&D Incentive Contracts," Working Papers 624, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Jonathan L. Willis & Julie Wroblewski, 2007. "What happened to the gains from strong productivity growth?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-23.
  9. Marco Cucculelli & Giacinto Micucci, 2009. "The Age Effect of Entrepreneurship: Founder's Tenure, Firm Performance and the Economic Environment," Mo.Fi.R. Working Papers 21, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  10. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883.
  11. Cui, Victor & Ding, Waverly W. & Yanadori, Yoshio, 2011. "Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms," Institute for Research on Labor and Employment, Working Paper Series qt4f7671kn, Institute of Industrial Relations, UC Berkeley.
  12. Toivanen, Otto & Väänänen, Lotta, 2010. "Returns to Inventors," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 309, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  13. Casey Ichniowski & Kathryn L. Shaw, 2009. "Insider Econometrics: Empirical Studies of How Management Matters," NBER Working Papers 15618, National Bureau of Economic Research, Inc.
  14. Shaw, Kathryn, 2009. "Insider econometrics: A roadmap with stops along the way," Labour Economics, Elsevier, vol. 16(6), pages 607-617, December.
  15. Leonard I. Nakamura, 2008. "Intangible assets and national income accounting," Working Papers 08-23, Federal Reserve Bank of Philadelphia.
  16. Maren M. Michaelsen, 2011. "The Hidden Increase in Wage Inequality: Skill-biased and Ability-biased Technological Change," Ruhr Economic Papers 0262, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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