In Search of Ideas: Technological Innovation and Executive Pay Inequality
62 Pages Posted: 14 Dec 2015 Last revised: 4 Jan 2016
Date Written: December 2015
We develop a general equilibrium model that delivers realistic fluctuations in both the level as well as the dispersion in executive pay as a result of changes in the technology frontier. Our model recognizes that executives add value to the firm not only by participating in production decisions, but also by identifying new investment opportunities. The economic value of these two distinct components of the executive's job varies with the state of the economy. Improvements in technology that are specific to new vintages of capital raise the skill price of discovering new growth prospects -- and thus raise the compensation of executives relative to workers. If most of the dispersion in managerial skill lies in the ability to find new projects, dispersion in executive pay will also rise. Our model delivers testable predictions about the relation between executive pay and growth opportunities that are quantitatively consistent with the data.
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