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

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  • Simeon Alder

    () (Department of Economics, University of Notre Dame)

Abstract

I explore mismatch between the attributes of projects and the managers that run them as a source of variation in aggregate output and total factor productivity(TFP). The model parameters are calibrated to match observations on the size distribution of U.S. manufacturing firms, the share and distribution of managerial compensation, and aggregate moments in the national accounts. Quantitatively, even minor deviations from efficient (assortative) matching can have sizeable effects on output and productivity. In addition, the gains associated with the dissolution of non-assortative project-manager pairs are of the same order ofmagnitude as those generated by the elimination of idiosyncratic distortions in Restuccia and Rogerson (2008) or Hsieh and Klenow (2009). “Cronyism”, where key managerial positions are allocated on the basis of political connections rather than talent, imposes a substantial burden on economic welfare and the model can reconcile the seemingly contradictory evidence from numerous case studies with recent contributions to the assignment literature.

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File URL: http://www3.nd.edu/~tjohns20/RePEc/deendus/wpaper/018_allocation.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by University of Notre Dame, Department of Economics in its series Working Papers with number 018.

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Length: 42 pages
Date of creation: Jan 2010
Date of revision: Nov 2012
Handle: RePEc:nod:wpaper:018

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Postal: 434 Flanner Hall, Notre Dame, IN 46556
Phone: (574) 631-7698
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Web page: http://economics.nd.edu
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Related research

Keywords: Matching; Complementarity; Misallocation; TFP; Cronyism;

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References

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  1. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  2. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
  3. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  4. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  5. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  6. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  7. Restuccia, Diego & Yang, Dennis Tao & Zhu, Xiaodong, 2008. "Agriculture and aggregate productivity: A quantitative cross-country analysis," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 234-250, March.
  8. Joseph M. Ostroy, 1978. "The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium," UCLA Economics Working Papers 139, UCLA Department of Economics.
  9. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
  10. Ostroy, Joseph M, 1984. "A Reformulation of the Marginal Productivity Theory of Distribution," Econometrica, Econometric Society, vol. 52(3), pages 599-630, May.
  11. 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..
  12. Paulson, Anna L. & Townsend, Robert, 2004. "Entrepreneurship and financial constraints in Thailand," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 229-262, March.
  13. Cole, Harold L. & Ohanian, Lee E. & Riascos, Alvaro & Schmitz, James Jr, 2005. "Latin America in the rearview mirror," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 69-107, January.
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