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

  • Simeon Alder

    ()

    (Department of Economics, University of Notre Dame)

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
Download Restriction: no

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
Contact details of provider: Postal: 434 Flanner Hall, Notre Dame, IN 46556
Phone: (574) 631-7698
Web page: http://economics.nd.edu
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  1. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2007. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers e07-3, Virginia Polytechnic Institute and State University, Department of Economics.
  2. Joseph M. Ostroy, 1977. "The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium," UCLA Economics Working Papers 090, UCLA Department of Economics.
  3. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
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  7. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  8. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  9. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
  12. 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.
  13. Ostroy, Joseph M, 1984. "A Reformulation of the Marginal Productivity Theory of Distribution," Econometrica, Econometric Society, vol. 52(3), pages 599-630, May.
  14. Paulson, Anna L. & Townsend, Robert, 2004. "Entrepreneurship and financial constraints in Thailand," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 229-262, March.
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