Difference that CEOs Make: An Assignment Model Approach
June 30, 2007
American Economic Review, Vol. 98, No. 3, pp. 642-668, 2008
This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in firm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value. The value-added of scarce CEO ability within the 1000 largest firms in the US was about $21-25 billion in 2004, of which the CEOs received about $4 billion as ability rents while the rest was capitalized into market values.
Number of Pages in PDF File: 43
Keywords: executive compensation, income distribution, matching models
JEL Classification: D30, G30, J31
Date posted: January 25, 2007 ; Last revised: February 22, 2009
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