Abstract
We develop a general equilibrium model that delivers realistic fluctuations in pay inequality 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. 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 and disparities in pay across executives. Our model implies that, controlling for firm size, compensation is higher in fast-growing firms and that pay inequality increases as investment opportunities in the economy improve. Both predictions are consistent with the data.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1-24 |
| Number of pages | 24 |
| Journal | Journal of Financial Economics |
| Volume | 130 |
| Issue number | 1 |
| DOIs | |
| State | Published - Oct 1 2018 |
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Keywords
- Executive compensation
- Inequality
- Innovation
- Technology
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management
Cite this
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In search of ideas : Technological innovation and executive pay inequality. / Frydman, Carola; Papanikolaou, Dimitris.
In: Journal of Financial Economics, Vol. 130, No. 1, 01.10.2018, p. 1-24.Research output: Contribution to journal › Article
TY - JOUR
T1 - In search of ideas
T2 - Technological innovation and executive pay inequality
AU - Frydman, Carola
AU - Papanikolaou, Dimitris
PY - 2018/10/1
Y1 - 2018/10/1
N2 - We develop a general equilibrium model that delivers realistic fluctuations in pay inequality 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. 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 and disparities in pay across executives. Our model implies that, controlling for firm size, compensation is higher in fast-growing firms and that pay inequality increases as investment opportunities in the economy improve. Both predictions are consistent with the data.
AB - We develop a general equilibrium model that delivers realistic fluctuations in pay inequality 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. 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 and disparities in pay across executives. Our model implies that, controlling for firm size, compensation is higher in fast-growing firms and that pay inequality increases as investment opportunities in the economy improve. Both predictions are consistent with the data.
KW - Executive compensation
KW - Inequality
KW - Innovation
KW - Technology
UR - http://www.scopus.com/inward/record.url?scp=85049526910&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85049526910&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2018.06.014
DO - 10.1016/j.jfineco.2018.06.014
M3 - Article
AN - SCOPUS:85049526910
VL - 130
SP - 1
EP - 24
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 1
ER -