Diverse Organizations and the Competition for Talent

Abstract

We propose a theory of firm production that requires diverse inputs. We show that in a competitive labor market, firms differ in their skill composition. Organizations with higher Total Factor Productivity (TFP) are larger and hire from a broader range of skills. Technological progress leads to an increase of all wages and results in downsizing. Quantifying productivity using our model shows that a CES production function generates unbiased estimates of TFP but biased estimates of marginal product and elasticity of substitution across skills. Our model also generates estimates of the TFP distribution based on CEO compensation alone.

Keywords: Labor Markets, Matching, Multi-agent Firms, Skill Distribution, Competition

JEL Classification: D02, D21, J2, J3