Abstract

https://ssrn.com/abstract=2911649
 


 



In Search of Ideas: Technological Innovation and Executive Pay Inequality


Carola Frydman


Boston University - Department of Economics

Dimitris Papanikolaou


Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

February 4, 2017

Sloan Foundation Economics Research Paper
Journal of Financial Economics (JFE), Forthcoming

Abstract:     
Pay inequality between executives and workers accounts for a substantial fraction of overall pay inequality in the United States. We develop a general equilibrium model that delivers realistic fluctuations in pay inequality -- both between executives and workers, and among executives in different firms -- as a result of changes in the technology frontier. In our model, executives add value to the firm not only by participating in production decisions, as do other workers in the economy, but also by identifying new investment opportunities. The economic value of these two distinct components of the executives' job varies with the state of the economy. Improvements in technology that are specific to new vintages of capital raise the return to managers' skills for discovering new growth projects, and thus increase the compensation of executives relative to workers. When most of the dispersion in managerial skills lies in the ability to find new projects, disparities in pay across executives in different firms also increases in response to these embodied technological shocks. Our model implies that, controlling for firm size, compensation is higher in fast growing firms. In addition, it implies that pay inequality increases as investment opportunities in the economy improve. Both predictions are consistent with historical and modern data on executive pay.

Number of Pages in PDF File: 51

Keywords: inequality, technology, executive compensation


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Date posted: February 6, 2017  

Suggested Citation

Frydman, Carola and Papanikolaou, Dimitris, In Search of Ideas: Technological Innovation and Executive Pay Inequality (February 4, 2017). Sloan Foundation Economics Research Paper; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2911649

Contact Information

Carola Frydman
Boston University - Department of Economics ( email )
270 Bay State Road
Boston, MA 02215
United States
Dimitris Papanikolaou (Contact Author)
Northwestern University - Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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