Credit Constraints, Competition, and Meritocracy

[...]This paper studies a simple model of the talent-ownership mismatch — or failure ofmeritocracy — brought about by credit market imperfections that arise as a consequence ofagency problems in the borrower-lender relationship. Our model highlights the interactionbetween the market for firms and the labor market. The key mechanism is that — for given severity of the credit market imperfections — an increase in the wage brings about greatermeritocracy. Specifically, a higher wage increases the incentive of untalented firm owners torelinquish the control of their firms, because it improves the payoff they get as workers andreduces — by increasing labor costs — the profit they earn as entrepreneurs.[...]