Luis Garicano 🇪🇺🇺🇦 @lugaricano@respublicae.eu

RT @ProfDiegoPuga: Fantastic thread by @lugaricano on the research on the organisation of firms spanning from Lucas (1978), including subsequent work by Rosen, himself with @HansbergRossi, and many others. https://t.co/xqzePn6QjW

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660638373151662083

And this is it for my brief summary of the "Assignment view of the firm," which was born out of Lucas' and, as Atalay, @aliHortacsu and @chadSyverson have argued, has the potential to explain other important equilibrium patterns about firms. 25/25

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458961856806912

Lucas himself would come back, at the end of his career. to these problems.
In 2019 he built a dynamic version of the model that @hansbergrossi and I had developed to study careers in firms. This is one of his last published pieces.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458957016641538

Yes. The basic Lucas style model predicts
- Concavity of wage in size in the cross section
- Linearity of wage in size in the time series
This is what we see in the time series and in the cross section.
22/25

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458954952933391

Does a marriage of talent with size explain the evolution of the size to wage relation, as well as the cross-sectional evidence on CEO pay?

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458952851701761

.@xgabaix and @augustinlandier take Lucas' theory in a different direction. They calibrate it to study whether recent changes in CEO Pay may be related, as the model predicts, to firm size changes.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458950163144704

Hence unlike in all previous literature, there is a one to one "marriage" between workers and managers.
Our framework allows us to have predictions on communication technology (makes organizations larger, deeper, deskills workers), and IT(shorter organizations, empowers workers.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458947629686787

Workers benefit from having good managers (they solve more problems and make their own time more productive), and managers benefit from having good workers (they need less help and allow managers to have a larger team).

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458944807022593

Rosen argues that it is necessary to introduce true complementarities between worker and manager talent.
@HansbergRossi and I do that in our QJE (2006) paper

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458942168813568

Hence talent of workers matters, and hierarchies have many layers.
But Rosen takes a short cut. Workers and managers are linear substitutes in "efficiency units" (talent is proportional).

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458939618664449

These two factors explain the puzzle:
- The scale economy of management requires that the most able personnel be assigned to top level positions in large firms.
- The diseconomy of direct supervision binds firm size, that can be relaxed by subordinating many hierarchical layers

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458934379921408

In 1982, Rosen turns to superstar firms by expanding on Lucas' model. Crucially, he includes multiple layers of hierarchy. It is a multiplicative technology, where the talent of one layer increases the value of those in the layer below.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458929636122624

Rosen had invented in 1981 the idea of superstar markets. Think of Messi, Ronaldo, Taylor Swift, Le Bron James:
1) close connection between personal rewards and the size of one's market;
2) both market size and reward are skewed toward the most talented in the activity.
Why?

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458924464586754

The model "predicts" the full size distribution of firms, but only given a distribution of managerial talent.
Lucas proceeds to test it empirically and finds that
as the model predicts there is a systematic effect of GNP on firm size (first row)

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458919280476167

Lucas starts from an economy with a given amount of capital and labor.

All agents have a level of managerial talent. Talent raises the productivity of the supervised bundle of labor and capital

A firm is one manager, together with the capital and labor under her control.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458912057884673

Lucas aims to implement Henry G. Manne (JPE 1965) suggestion that the market assigns more resources to better managers: "the observed size distribution is a solution to the problem: allocate productive factors over managers of different ability so as to maximize output."

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458909562183680

The size distribution which emerges is a solution to the problem: allocate production over firms to minimize total cost.
It goes without saying that this is counterfactual for firm size.
Here is the actual firm size distribution (Axtell, Science 2001).

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458906643050496

Before Lucas 1978, we had Marshall-Viner: individual firms have U-shaped long-run average cost functions. In equilibrium, each firm produces at the minimum point of this curve, with firm entry or exit adapting to get aggregate production. Resonable for plants, but not for firms!

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458904101216257

We have seen much about Bob Lucas' macro contributions these days, but he also had a highly influential contribution to the theory of the firm: the "assigment theory of the firm", which explains, for instance, why Musk earns so much (and controls so many resources).
THREAD

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458901362421763

RT @alessionaval: That’s powerful. And really making a statement about leadership in East Asia. Compare the simple, poignancy of this, with the loudness of Xi’a reception of central Asian states in Beijing. Just remarkable difference. https://t.co/9CfveAARhk

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660437884489416704