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Title: Information Technology and the Growing Inequality in Managerial Compensation

Citation Type: Miscellaneous

Publication Year: 2008

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Abstract: Three of the most fundamental changes in US corporations since the early 1970s havebeen (1) the apparent increase in the importance of organizational capital in production, (2)the increase in managerial income inequality and pay-performance sensitivity and (3) thesecular decrease in labor market reallocation. Our paper develops a simple explanation forthese changes: a shift in the composition of productivity growth away from vintage-specific togeneral growth, brought about by the arrival and gradual adoption of information technologysince the 1970s. This shift has stimulated the accumulation of organizational capital inexisting firms and reduced the need for reallocating workers to new firms. We characterizethe optimal managerial compensation contract when firms accumulate organizational capitalbut risk-averse managers cannot commit to staying in the match. A calibrated version ofthe model reproduces the increase in managerial compensation inequality and the increasedsensitivity of pay to performance in the data over the last three decades. In addition, we showthat firms in industries with less vintage-specific growth and hence more more compensationinequality have higher Tobins q, as predicted by our model.

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Authors: Syverson, Chad; Van Nieuwerburgh, Stijn; Lustig, Hanno

Publisher: UCLA Anderson

Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure

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