Measuring Managerial Ability: Getting Close to the Holy Grail
23 Pages Posted: 8 Feb 2017
Date Written: February 8, 2017
Managerial ability is remarkably difficult to robustly measure, especially when unique data on firms and their managers are not available. We propose a new latent-variable model estimated with Bayesian techniques that requires only the usual accounting data on inputs and outputs and thus can be applied to any firm. We show that our managerial ability estimates are more than 90% correlated with existing robust measures derived from a very specialized data set by Bloom and Van Reenen (2007). We also validate our model using Monte Carlo simulations and show that frontier-based methods previously used to estimate managerial ability do not provide good approximations. We conclude that our method produces robust estimates of managerial ability, while having the advantage that can be applied to all firms for which very simple accounting data are available.
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