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Corporate Control and Executive Selection

  • F. Lippi

    ()

  • F. Schivardi

    ()

We present a model in which the owner of the firm enjoys a private benefit from developing a personal relationship with the executives. This may lead the owner to retain a senior executive in office even though a more productive replacement is available. The model shows that the private returns of the employment relationship distort executive selection, reducing the executives’ average ability and the firm productivity. We estimate the structural parameters of the model using a panel of Italian firms with information on the nature of the controlling shareholder, matched with individual records of their executives. These estimates are used to quantify the relevance of private returns and the related productivity gap across firms characterized by four different types of ownership - government, family, conglomerate and foreign. We find that private returns are large in family and government controlled firms, while smaller with other ownership types. The resulting distortion in executive selection can account for TFP differentials between control types of about 10%. The structural estimates are fully consistent with a set of model-based OLS regressions, even though the sample moments used by the two approaches are different.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201021.

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Date of creation: 2010
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Handle: RePEc:cns:cnscwp:201021
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  1. Susanna Iranzo & Fabiano Schivardi & Elisa Tosetti, 2006. "Skill dispersion and firm productivity; an analysis with employer-employee matched data," Temi di discussione (Economic working papers) 577, Bank of Italy, Economic Research and International Relations Area.
  2. Landier, Augustin & Sraer, David & Thesmar, David, 2006. "Bottom-Up Corporate Governance," CEPR Discussion Papers 5500, C.E.P.R. Discussion Papers.
  3. Nicholas Bloom & Christos Genakos & Raffaella Sadun & John Van Reenen, 2012. "Management Practices Across Firms and Countries," NBER Working Papers 17850, National Bureau of Economic Research, Inc.
  4. George-Levi Gayle & Limor Golan & Robert A. Miller, . "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers 2008-E32, Carnegie Mellon University, Tepper School of Business.
  5. Bandiera, Oriana & Guiso, Luigi & Prat, Andrea & Sadun, Raffaella, 2009. "Matching Firms, Managers, and Incentives," CEPR Discussion Papers 7207, C.E.P.R. Discussion Papers.
  6. Federico Cingano & Fabiano Schivardi, 2004. "Identifying the Sources of Local Productivity Growth," Journal of the European Economic Association, MIT Press, vol. 2(4), pages 720-742, 06.
  7. Fernando Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," EIEF Working Papers Series 0807, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2007.
  8. claudio Michelacci & Fabiano Schivardi, 2008. "Does Idiosyncratic Business Risk Matter?," EIEF Working Papers Series 0813, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2008.
  9. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2009. "Social Connections and Incentives in the Workplace: Evidence From Personnel Data," Econometrica, Econometric Society, vol. 77(4), pages 1047-1094, 07.
  10. 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.
  11. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
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