Assortative Matching with Large Firms: span of control over more versus better workers

Speaker: Philipp Kircher, London School of Economics

Organized by: Department of Economics and Department of Decision Sciences with Paolo Baffi Centre

Abstract: In large firms, management resolves a trade off between hiring more versus better workers. The span of control or size is therefore intimately intertwined with the sorting pattern. This is important for macro and cross-country comparisons of productivity, for applications in international trade, and for labor markets. We analyze the worker assignment, firm size, and wages. The sorting assignment between workers and firms is governed by an intutitive cross-margin-complementarity condition that captures the complementarities between qualities (of workers and firms), and quantities (of the work force and firm resources). A simple system of two differential equations determines the equilibrium firm size and wages. More productive firms are larger if their advantage to increase the span of control (the firm type-workforce size complementarity) outweighs the workersírelative advantage of the use of firm resources (the worker type-firm resource complementarity).