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Firm Size, Productivity, and Manager Wages: A Job Assignment Approach

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  • Grossmann Volker

    (University of Fribourg)

Abstract

Ability of managers and other nonproduction professionals is key for the productivity of firms. Hence, the assignment of heterogeneous nonproduction workers across firms determines the distribution of productivity. In turn, the transmission of productivity differences into profit differences -- resulting from product market competition -- determines firms' willingness to pay for higher managerial skills. This paper explores the equilibrium assignment of nonproduction workers across ex ante identical firms which results from this interaction between product market and the market for nonproduction skills. The analysis suggests that, typically, large and productive firms coexist with small, low-productivity firms. Consistent with empirical evidence, a skewed distribution of firm size tends to arise. Moreover, the model predicts a positive relationship of firm size to productivity, manager quality, and manager remuneration. Finally, according to comparative-static analysis, higher intensity of product market competition can account for increases in the compensation at the top of the wage distribution.

Suggested Citation

  • Grossmann Volker, 2007. "Firm Size, Productivity, and Manager Wages: A Job Assignment Approach," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-41, February.
    • Handle: RePEc:bpj:bejtec:v:7:y:2007:i:1:n:8
    DOI: 10.2202/1935-1704.1321
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    Cited by:

    1. Prettner, Klaus & Strulik, Holger, 2018. "Trade and productivity: The family connection redux," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 276-291.
    2. Ksenija Dencic-Mihajlov, 2014. "Profitability During the Financial Crisis Evidence from the Regulated Capital Market in Serbia," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 12(1), pages 7-33.

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