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Economic Quarterly

Fall 2003

Firms, Assignments, and Earnings

Edward S. Prescott

Earnings within a firm usually increase with job rank. Earnings across firms usually increase with firm size. An assignment model addresses these facts. People are assigned to firms and to jobs within these firms by their managerial talent. In equilibrium, higher quality managers are assigned more workers and their pay increases more than proportionally with their talent. Special attention is devoted to the connection between firm size and the level of executive pay.

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