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

Abstract

I explore mismatch between firms and their managers as a source of variation in aggregate output and total factor productivity (TFP). The model is calibrated to match observations on the size distribution of US manufacturing firms, managerial compensation, and aggregate moments in the national accounts. Quantitatively, small deviations from assortative matching can have sizeable effects on output and TFP. “Cronyism,” where managerial positions are allocated by status rather than talent, imposes a substantial burden on economic welfare. Moreover, the model can reconcile the seemingly contradictory evidence from numerous case studies with results from recent contributions to the assignment literature. (JEL D24, E23, L11, L60, M52, O40)