On the Distribution of Income and Worker Assignment Under Intrafirm Spillovers, with an Application to Ideas and Networks

I study the earnings structure and the equilibrium assignment of workers when workers exert intrafirm spillovers on each other. I allow for arbitrary spillovers, provided that output depends on some aggregate index of workers' skill. Despite the possibility of increasing returns to skills, equilibrium typically exists. I show that equilibrium will typically be segregated and that the skill space can be partitioned into a set of segments and any firm hires from only one segment. Next, I apply the model to analyze the effect of information technology on segmentation and the distribution of income. There are two types of human capital: productivity and creativity, that is, the ability to produce ideas that may be duplicated over a network. Under plausible assumptions, inequality rises and then falls when network size increases, and the poorest workers cannot lose. I also analyze the impact of an improvement in worker quality and of an increased international mobility of ideas