Distortions, Endogenous Managerial Skills and Productivity Differences

• BSE Working Paper: 110158 | September 15
• Keywords: distortions , size , skill investments , productivity differences
• JEL codes: O40, E23
• distortions
• size
• skill investments
• productivity differences

We develop a span-of-control model where managerial skills are endogenous and the outcome of investments over the life cycle of managers. We calibrate this model to U.S. plant-size data to quantify the effects of distortions that are correlated with the size of production units, and how these effects are amplified by managerial investments. We find a quantitatively important role for managerial investments. Distortions that consist of a tax rate of 20% on the top 50% managers reduce steady-state output by about 14.6% in our benchmark model. When skills are exogenous the reduction is about 9.2%.