Assortative Matching in Managerial Labor Markets: Theory and Measurement

This paper provides evidence on the importance of complementarities in production within executive teams. Using data on top managers in large U.S. firms, I find that the managerial labor market is characterized by the high degree of within-firm positive sorting, which implies that better managers are matched with better co-workers. Sorting significantly contributes to the evolution of firm productivity and distribution of top incomes in the economy. Firms with better executive teams outgrow their competitors by 30 percent over the five year period. Further, more than a third of observed pay inequality among top executives is directly attributable to within-firm sorting. Applying the model to analyze the degree of sorting between managers and directors, I find evidence of significant complementarities in production between managerial and director skill. This result points to the importance of board of directors’ advisory role in the U.S.