Organizational Capital, Managerial Heterogeneity, and Firm Dynamics

Abstract:
We develop a simple model of firm dynamics, where firm performance depends on a set of intangible assets that we call organizational capital. In turn, the growth of organizational capital depends on the ability and behavior of the CEO. The profit-maximizing firm owner can hire and fire the CEO but she faces informational and contractual constraints. Equilibrium is characterized by the co-existence of firms with different organizational capital, different leadership styles, and different performances. This model rationalizes stylized facts about firm performance, management practices, and CEOs.