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Technological Change and the Growing Inequality in Managerial Compensation

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Author Info
Hanno Lustig
Chad Syverson
Stijn Van Nieuwerburgh

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Abstract

Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14661.

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Date of creation: Jan 2009
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Handle: RePEc:nbr:nberwo:14661

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E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
G3 - Financial Economics - - Corporate Finance and Governance

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References listed on IDEAS
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    Other versions:
  2. Ellen R. McGrattan & Edward C. Prescott, 2007. "Unmeasured Investment and the Puzzling U.S. Boom in the 1990s," NBER Working Papers 13499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Fatih Guvenen & Burhanettin Kuruscu, 2007. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution: 1970-2000," NBER Working Papers 13095, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. 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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  6. Bennedsen, Morten & Pérez-González, Francisco & Wolfenzon, Daniel, 2007. "Do CEOs Matter?," Working Papers 13-2007, Copenhagen Business School, Department of Economics. [Downloadable!]
  7. Christopher H. Wheeler, 2005. "Evidence on wage inequality, worker education, and technology," Review, Federal Reserve Bank of St. Louis, issue May, pages 375-393. [Downloadable!]
  8. Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute for the Study of Labor (IZA). [Downloadable!]
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  9. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02. [Downloadable!] (restricted)
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  10. Stephen Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms," Working Papers 06-17, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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