Working Paper: NBER ID: w14661
Authors: Hanno Lustig; Chad Syverson; Stijn Van Nieuwerburgh
Abstract: Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades.
Keywords: Organizational Capital; Managerial Compensation; Income Inequality; Productivity Growth
JEL Codes: E2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift in the composition of productivity growth (O49) | accumulation of organizational capital (D29) |
| accumulation of organizational capital (D29) | managerial compensation inequality (M12) |
| shift in the composition of productivity growth (O49) | managerial compensation inequality (M12) |
| accumulation of organizational capital (D29) | optimal managerial compensation contract adjustment (M52) |
| optimal managerial compensation contract adjustment (M52) | pay-performance sensitivity (J33) |
| ability of managers to transfer organizational capital (D29) | managerial compensation (M12) |
| ability of managers to transfer organizational capital (D29) | pay-performance sensitivity (J33) |