technology5

Management as a Technology (MAT) 

      In Lucas (1978) or Melitz (2003) style models, firm performance is increasing continuously in the level of managerial quality, which is synonymous with productivity. Firms draw a level of management quality when they are born, and this continues with them throughout their lives. Since these types of models assume G(Mi) is increasing in Mi , we simplify the revenue function by 7Since firms in our data are typically small in relation to their input and output markets, for tractability we ignore any general equilibrium effects, taking all input prices (for capital, labor and management) as constant. 6 assuming G(Mi) = Mc i PiYi = AiKa i L b iMc i More generally, we want to allow for the possibility that management can also be endogenously improved; for example, by hiring management consultants, spending time developing improved organizational processes (e.g. Toyota’s Kaizen meetings), or paying for a better CEO. Although managerial capital can be improved in this way, failure to invest may mean it depreciates over time like other tangible and intangible assets such as physical capital, R&D, and advertising. Hence, we set up a more general model which still has initial heterogeneous draws of management when firms enter, but treats management as an intangible capital stock with depreciation: