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Economic Development and the Organization of Production

Author

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  • Ananth Seshadri

    (University of Wisconsin)

  • Nicolas Roys

    (University of Wisconsin Madison)

Abstract

How important is managerial talent in accounting for cross country income differences? We address this question using a model that distinguishes between workers human capital and managers human capital. In our model, the ablest people leverage their talent and this has important consequences for a country’s standard of livings. A key object for the existing literature argument is the returns to schooling. Once we distinguish between workers and managers: returns to schooling appear as profits rather than wages. We consider an overlapping generations economy where each individual chooses to be a manager or a worker depending on its human capital (as in Lucas, 1978), individual accumulate human capital both in school and on the job (as in Ben-Porath, 1967), and production occurs in teams where there is sorting between workers and managers (as in Garicano and Rossi-Hansberg, 2006). By nesting a model of managerial occupational choice and endogenous skill accumulation in a framework in which the span of control is endogenous, we develop a rich framework that yields a number of empirical implications. We find that (1) aggregate output is more sensitive to managerial talent than worker talent, (2) the span of control of managers is constrained by workers human capital, and (3) small variations in human capital can have large effects on wages and profits so that incentives to accumulate human capital at the top of the distribution are large. We calibrate the model to the US economy and show that it can rationalize simultaneously the life-cycle of wages of managers and workers as well as the life-cycle of firms. We then ask how much variations do we need to account for output per capita differences? Preliminary results show that modest distortions can lead to large income differences.

Suggested Citation

  • Ananth Seshadri & Nicolas Roys, 2012. "Economic Development and the Organization of Production," 2012 Meeting Papers 456, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:456
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    Citations

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    Cited by:

    1. Luis Garicano & Esteban Rossi-Hansberg, 2015. "Knowledge-Based Hierarchies: Using Organizations to Understand the Economy," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 1-30, August.
    2. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    3. Pedro Gomes & Zoe Kuehn, 2017. "Human capital and the size distribution of firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 164-179, October.
    4. Lutz Hendricks & Todd Schoellman, 2018. "Human Capital and Development Accounting: New Evidence from Wage Gains at Migration," The Quarterly Journal of Economics, Oxford University Press, vol. 133(2), pages 665-700.
    5. Jan Grobovšek, 2020. "Managerial Delegation, Law Enforcement, and Aggregate Productivity," Review of Economic Studies, Oxford University Press, vol. 87(5), pages 2256-2289.
    6. Pedro Gomes & Zoe Kuehn, 2017. "Human capital and the size distribution of firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 164-179, October.
    7. Markus Poschke, 2018. "The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(3), pages 1-41, July.
    8. Alvarez-Cuadrado, Francisco & Japaridze, Irakli, 2017. "Trickle-down consumption, financial deregulation, inequality, and indebtedness," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 1-26.
    9. Bo-Xiang Hsu & Yi-Min Chen, 2021. "Why university matters: the impact of university resources on foreign workers’ human and social capital accumulation," International Entrepreneurship and Management Journal, Springer, vol. 17(1), pages 45-61, March.
    10. Ufuk Akcigit & Harun Alp & Michael Peters, 2021. "Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries," American Economic Review, American Economic Association, vol. 111(1), pages 231-275, January.
    11. Marti Mestieri & Johanna Schauer & Robert Townsend, 2017. "Human Capital Acquisition and Occupational Choice: Implications for Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 151-186, April.
    12. Tommaso Porzio, 2016. "Distance to the Technology Frontier and the Allocation of Talent," 2016 Meeting Papers 569, Society for Economic Dynamics.

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