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

  • Simeon Alder

    (UCLA)

I explore mismatch between firm quality and firm management as a mechanism for variations in total factor productivity (TFP) across countries. In my calibrated model, even minor deviations from efficient (assortative) matching have sizeable effects on output and productivity. Underlying this result is the finding that the aggregate implications of matching frictions are highly sensitive to the degree of complementarity between firm and manager attributes. In addition, the relative dispersion of firm and managerial attributes is also key to quantifying the aggregate effects of matching frictions. The key model parameters are pinned down by calibrating the model to U.S. observations on the firm-size distribution and the level and distribution of managerial compensation. My results imply that "crony capitalism", where key managerial positions are allocated on the basis of political connections rather than talent, imposes a substantial burden on economic welfare.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1265.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1265
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  1. Berthold Herrendorf & Arilton Teixeira, . "Barriers to Entry and Development," Working Papers 2167726, Department of Economics, W. P. Carey School of Business, Arizona State University.
  2. 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.
  3. Lucian Bebchuk, . "The Costs of Entrenched Boards," American Law & Economics Association Annual Meetings 1091, American Law & Economics Association.
  4. 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.
  5. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  6. 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.
  7. David N. DeJong & Chetan Dave, 2007. "Introduction to Structural Macroeconometrics
    [Structural Macroeconometrics]
    ," Introductory Chapters, Princeton University Press.
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