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American Economic Review: Vol. 98 No. 3 (June 2008)

AER Volume. 98, Issue 3 | Previous ArticleNext Article

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The Difference That CEOs Make: An Assignment Model Approach

Article Citation

Tervio, Marko. 2008. "The Difference That CEOs Make: An Assignment Model Approach." American Economic Review, 98(3): 642-68.

DOI: 10.1257/aer.98.3.642

Abstract

This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in firm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value.

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Authors

Tervio, Marko (U CA, Berkeley)

JEL Classifications

G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L25: Firm Performance: Size, Diversification, and Scope
M12: Personnel Management; executive compensation
M52: Personnel Economics: Compensation and Compensation Methods and Their Effects