The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms

In this paper, we construct a dynamic assignment model that can provide a unified explanation of several observed features of persistent differences in productivity, wages, skill mixes and profits between firms. Large organization capital (high firm-specific knowledge) attracts skilled workers, who can create further organization capital in the future. This positive feedback brings about persistent differences in these variables. We also analyze how the real and perceived values of a firmfs organization capital interactively influence persistence. We estimate parameters and simulate the model. Our results show that a positive assignment mechanism accounts for a large part of the observed persistence.