DP20433 Macroeconomic Implications of Executive Pay Caps

Business

I study the introduction of statutory caps on excutive pay ratios (pay caps) in a span-of-control economy with heterogenous managerial talent. Managers hire fewer workers than they would in the absence of pay caps, and the marginal product of labor is not equalized among firms. The ability of the marginal manager declines. Inequality between managers and workers, and among managers, declines, but inequality among workers increases. Quantitatively, overall inequality decreases substantially,