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Dynamic Sorting

Author

Listed:
  • Moritz Meyer-ter-Vehn

    (UCLA)

  • Lee Ohanian

    (University of California Los Angeles)

  • Simeon Alder

    (University of Notre Dame)

Abstract

We introduce a novel assignment model to understand patterns of firm growth and entrepreneurial (managerial) turnover. The economy is endowed with a measure of en- trepreneurs who are distinct in two dimensions: they vary in their skill e to operate a given technology and in their ability to innovate, q. In addition, the economy is populated by an endogenous distribution of firms with exogenous entry and exit. High-q entrepreneurs are more likely to grow their form than a low-q manager. The entrepreneurs’ e and q attributes are not perfectly correlated, in general, and the planner faces an assignment trade-off between maximizing current output and fostering innovation. Since entry and exit are exogenous, our theory emphasizes survivor growth over selection to account for the life cycle of firms. The model makes sharp predictions for the handover of firms from relatively "innovative" entrepreneurs to more "efficient" managers. In an extension we characterize the effects on optimal matching introduced by match-specific capital, learn- ing about managerial types, financial constraints, and contractual frictions.

Suggested Citation

  • Moritz Meyer-ter-Vehn & Lee Ohanian & Simeon Alder, 2013. "Dynamic Sorting," 2013 Meeting Papers 518, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:518
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    References listed on IDEAS

    as
    1. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, pages 49-84.
    2. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, pages 745-788.
    3. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, pages 388-401.
    4. David Austen-Smith & Roland G. Fryer, 2005. "An Economic Analysis of "Acting White"," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 551-583.
    5. David Austen-Smith & Ronald G. Fryer, 2005. "An Economic Analysis of 'Acting White'," Discussion Papers 1399, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Cai, Hongbin & Riley, John & Ye, Lixin, 2007. "Reserve price signaling," Journal of Economic Theory, Elsevier, vol. 135(1), pages 253-268, July.
    7. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    8. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    9. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, pages 49-84.
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    Cited by:

    1. Simeon D. Alder, 2016. "In the Wrong Hands: Complementarities, Resource Allocation, and TFP," American Economic Journal: Macroeconomics, American Economic Association, pages 199-241.
    2. Simeon Alder, 2016. "A Tale of Two C(...)s: Competence and Complementarity," 2016 Meeting Papers 1583, Society for Economic Dynamics.
    3. Simeon D. Alder, 2016. "In the Wrong Hands: Complementarities, Resource Allocation, and TFP," American Economic Journal: Macroeconomics, American Economic Association, pages 199-241.

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