Managers, Coordination, and the Firm Age-Wage Relationship

This paper describes a version of Lucas’ span of control model, in which managers of younger and smaller firms are less able than managers of older firms to provide precise instructions to employees. Employees differ in their propensity to follow instructions, and those least likely to follow instructions are said to be high-a types. In equilibrium, younger [older] firms employ high-a [low-a] types, and wages exhibit a U-shaped relationship in which the lowest wages are paid by firms of intermediate age. A natural extension of the model, in which employee ability also varies, is developed to examine the effect of employer age and size on entry into self-employment.