Capabilities as Compensation

18 May 2006 at 12:49 pm 1 comment

| Peter Klein |

Lots of blogospheric buzz today about this paper on local production externalities and researcher compensation (Mankiw, Caplan). The paper examines output and pay for economics and finance professors and concludes that the productivity effect of being at an “elite” university — i.e., having daily personal contact with top-notch colleagues and students — has fallen sharply over the last three decades. (Advances in information technology are seen as the likely cause.) Moreover, as compensation theory would predict, these spillover effects and faculty salaries appear to be substitutes; as the intangible benefits of co-location decrease, universities must increase wages to retain top staff.

The empirical approach used in the paper has obvious applications to the knowledge-management and capabilities literatures more generally. To the extent that the firm’s capabilities are consumed by employees — XYZ Company is an exciting, dynamic, enjoyable place to work — the firm should be able to pay lower wages, other things equal. Using panel data and fixed effects it should be possible, econometrically, to estimate firm-specific capabilities that are reflected in below-market wages. I’m not aware of any capabilities or knowledge-management papers that utilize this approach, however. Am I wrong?

Entry filed under: - Klein -, Management Theory, Theory of the Firm. Tags: .

Those Right-Wing Economists Multi-Culturality and Economic Organization

1 Comment Add your own

  • 1. brayden  |  18 May 2006 at 12:56 pm

    I was actually just thinking about this issue – although not for the same reasons. I think the biggest problem with doing this kind of analysis is getting the data. I’m not aware of any datasets that would allow you to match employee wages with firm-specific information (unless you count Execucomp, which only tells you the wages of the top-five paid employees).

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