Econometrica: Nov 2015, Volume 83, Issue 6

Promotion, Turnover, and Compensation in the Executive Labor Market

DOI: 10.3982/ECTA11020
p. 2293-2369

George‐Levi Gayle, Limor Golan, Robert A. Miller

This paper develops a generalized Roy model with human capital accumulation, moral hazard, and career concerns. We identify and estimate the model with a large panel that matches data on publicly listed firms to information on their executives. The structural estimates obtained are used to decompose the firm‐size pay gap. We find that although total compensation and incentive pay increase with firm size, certainty‐equivalent pay decreases with firm size. In larger firms, and for more highly ranked executives, weaker signal quality about effort results in higher risk premiums. This risk premium accounts for roughly 80 percent of the firm‐size gap in total compensation. Larger firms are also willing to pay more than smaller ones to attract executives. Finally, the estimated coefficients on human capital accumulation from formal education and experience gained from different firms are individually significant, but their collective effect on firm‐size pay differentials nets out.

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Supplemental Material

Supplement to "Promotion, Turnover, and Compensation in the Executive Labor Market"

This appendix includes supplemental materials for the model, identification, estimation, data and results discussed in the manuscript.  Section A contains the derivation of the formulas used in the model, identification and estimation for type I extreme value distributions.  Section B presents details on the data constructions and summary of the main sample used in the paper.  Section C presents the first-stage estimation.  Section D presents additional result tables not included in the paper.

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Supplement to "Promotion, Turnover, and Compensation in the Executive Labor Market"

This zip file contains the replication files for the manuscript.

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