Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities

126 Pages Posted: 4 Jan 2023 Last revised: 14 Nov 2023

Date Written: December 15, 2022

Abstract

Recent studies attribute the rise in wage inequality primarily to widening pay disparities between rather than within firms. I develop a novel theory to quantitatively explain this fact. The theory has three core features: production takes place in teams; workers are heterogeneous in talent and are specialized in specific tasks; and labor markets are frictional. Specialization endogenously generates coworker complementarity: talented workers gain more from more talented colleagues. This creates an incentive for assortative matching, fostering dispersion in average wages across firms. Search frictions prevent perfect sorting in equilibrium, though. Using administrative panel data for Germany, I measure complementarities, validate key mechanisms, and structurally estimate the model. I argue that specialization has intensified since the mid-1980s, and show that coworker complementarities and talent sorting have strengthened concurrently, aligned with the theory's predictions. According to model exercises, this explains ~40% of the observed increase in the between-firm share of wage inequality, and contributed to elevated firm-level productivity dispersion. Rising complementarities also worsened aggregate output costs from coworker mismatch, but endogenously increased sorting partly mitigated this effect.

Keywords: Coworker complementarity, firms, inequality, matching, specialization, teams

JEL Classification: D24, D31, E24, J24, O33, O47

Suggested Citation

Freund, Lukas, Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities (December 15, 2022). Available at SSRN: https://ssrn.com/abstract=4312245 or http://dx.doi.org/10.2139/ssrn.4312245

Lukas Freund (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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