The Shrinking of Middle Management

Catherine C. de Fontenay, Dept. of Economics and Melbourne Busines

Abstract

We analyze a model in which (1) managers require experience in order to be productive; (2) providing managers with experience is costly and non-contractible. We demonstrate that if there is an increase in the mobility of managers, there may be a free-riding problem, in that each firm has too little incentive to give managers experience. Surprisingly, welfare may be higher in the state of the world with more mobility. We explore individual managers’ incentives to invest in generalizing their skills to improve their mobility.