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In Search of Ideas: Technological Innovation and Executive Pay Inequality

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  • Carola Frydman
  • Dimitris Papanikolaou

Abstract

We develop a general equilibrium model that delivers realistic fluctuations in both the level as well as the dispersion in executive pay as a result of changes in the technology frontier. Our model recognizes that executives add value to the firm not only by participating in production decisions, but also by identifying new investment opportunities. The economic value of these two distinct components of the executive's job varies with the state of the economy. Improvements in technology that are specific to new vintages of capital raise the skill price of discovering new growth prospects -- and thus raise the compensation of executives relative to workers. If most of the dispersion in managerial skill lies in the ability to find new projects, dispersion in executive pay will also rise. Our model delivers testable predictions about the relation between executive pay and growth opportunities that are quantitatively consistent with the data.

Suggested Citation

  • Carola Frydman & Dimitris Papanikolaou, 2015. "In Search of Ideas: Technological Innovation and Executive Pay Inequality," NBER Working Papers 21795, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21795
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    1. Christopher Kurzhals & Lorenz Graf‐Vlachy & Andreas König, 2020. "Strategic leadership and technological innovation: A comprehensive review and research agenda," Corporate Governance: An International Review, Wiley Blackwell, vol. 28(6), pages 437-464, November.

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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