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

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

Two factors:
- Management involves discrete and indivisible choices (such as which goods to produce, in what varieties and volume)--a strong scale economy
- a supervisory activity that congests management scale economies and produces determinate firm size

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458932131774466

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

The key input to explain these facts is the limited substitution between the talent of different artists, doctors etc. "hearing a succession of mediocre singers does not add up to a single outstanding performance. "

The reward function raises with the size of the market-- fast!

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458927346053120

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

Lucas argues his model has two main holes: homogenous workers, only one layer.

Sherwin Rosen (1982), another (sadly deceased too early) @uchicago economist (and inspiration of much of my work), set to solve these problems.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458922262646784

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

Now think dynamically about firm growth

Gibrat law: A well-known feature of observed patterns in firm growth, however, is the independence of firm growth and size.

Lucas: to obey Gibrat's law a necessary and sufficient condition is for the span function to be a power funct.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458916818345984

The key implication is the "scale of operations effect" : more talented managers can run larger firms more efficiently and earn higher profits, which leads to a positive correlation between firm size and earnings.

Earnings grow more than proportionally with talent.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660458914737946624

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

RT @toniroldanm: Decrecentistas of the world, no más chapas please https://t.co/dKZR1t5Z9u

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660391676735520771

The key unknown floating in the air during the interview is not the complex strategic situation (China, AI, Russia) but the extremely unpredictable domestic politics in the US (Trump!). That is the element that could plunge the world into a catastrophic war.

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660299979666202624

There are many, many memorable things. But I am going to stay on one that seems obvious to many of us, foreign friends of the US, and yet seems impossible to understand for many in progressive America. (last par)

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660299185256644609

This full transcript of the Kissinger interview on how to avoid War with China is mandatory Sunday reading. Fantastic.

(and congrats to @TheEconomist @zannymb for the pertinent questions).

https://archive.is/yaBWE

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660299183302098944

RT @Noahpinion: Getting Trump elected is definitely Putin's only real plan to win the war at this point https://t.co/8JkPJ4zoF3

🐦🔗: https://n.respublicae.eu/lugaricano/status/1660128002255060993