On the other hand, many scholars, particularly financial economists, have derived a powerful ought from the empirical observation of what is by ascribing the cause of rising pay wholly to the operation of a competitive market—the market for scarce and valuable managerial talent.
This is the school of thought broadly classified as the theory of “optimal contracting.”
The operation of large and complex business enterprises is a difficult task.
Those who can do it well are exceedingly rare and sought after for the value they can create for investors in doing so.
Consequently, wages are seen to merely respond to the demand for and value of such skills, while competition precludes the involvement of rents for either party.
High wages are the outcome of an efficient bidding for talent and the resultant sorting of managers to firms, which is consistent with maximizing shareholder value. This view has become quite popular, especially subsequent to Xavier Gabaix and Augustin Landier’s calibrated general equilibrium model and the explanatory power they claimed it possessed.
We question, however, the legitimacy of relying upon such a conception of a
competitive market for talent – and as a result the related efficiency claims – in explaining the rising pay of executives.
We criticize the competitive markets approach mainly on the basis of market frictions and the characteristics of “thin” labor markets.
Specifically, we will address the question of executive transferability and the implications for any notion of a centralized market exchange for talent.
A more recent approach has sought to explain the cause of rising pay from a sociological or an institutional context.
The proponents of this view see overwhelming ambiguity as essential to the nature of any appraisal of executive worth and to the corresponding negotiation of compensation amounts.
On the other hand, many scholars, particularly financial economists, have derived a powerful ought from the empirical observation of what is by ascribing the cause of rising pay wholly to the operation of a competitive market—the market for scarce and valuable managerial talent.This is the school of thought broadly classified as the theory of “optimal contracting.”The operation of large and complex business enterprises is a difficult task.Those who can do it well are exceedingly rare and sought after for the value they can create for investors in doing so.Consequently, wages are seen to merely respond to the demand for and value of such skills, while competition precludes the involvement of rents for either party.High wages are the outcome of an efficient bidding for talent and the resultant sorting of managers to firms, which is consistent with maximizing shareholder value. This view has become quite popular, especially subsequent to Xavier Gabaix and Augustin Landier’s calibrated general equilibrium model and the explanatory power they claimed it possessed.We question, however, the legitimacy of relying upon such a conception of acompetitive market for talent – and as a result the related efficiency claims – in explaining the rising pay of executives.We criticize the competitive markets approach mainly on the basis of market frictions and the characteristics of “thin” labor markets. Specifically, we will address the question of executive transferability and the implications for any notion of a centralized market exchange for talent.A more recent approach has sought to explain the cause of rising pay from a sociological or an institutional context.The proponents of this view see overwhelming ambiguity as essential to the nature of any appraisal of executive worth and to the corresponding negotiation of compensation amounts.
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