Revenue diversion, the allocation of talent, and income distribution

• Published in: Mathematical social sciences 2021-07, Vol.112, p.138-144
• Main Authors: Benhabib, Jess, Hager, Mildred
• Format: Article
• Language: English
• Subjects: Ability; Complementarity; Decision making models; Earnings; Equilibrium; Income distribution; Income inequality; Income taxes; Occupational choice; Occupations; Productivity; Resource allocation; Revenue; Revenue diversion; Workers
• ISSN: 0165-4896; 1879-3118
• DOI: 10.1016/j.mathsocsci.2021.03.017

We study an equilibrium model of “revenue diversion” by management and its effects on talent allocation and the earnings distribution. In our occupational choice model with “workers” and “managers”, the talent allocation depends on earnings across occupations. Revenue diversion makes the allocation inefficient. It contributes, beyond productivity differentials, to income inequality and the Pareto tail of the income distribution. Any “diverted” revenue accrues to a small fraction of the population, and therefore noticeably impacts inequality, as illustrated in our calibration. We briefly introduce capital, allowing management to divert from both workers and capital, and also complementarity between workers and management. •We study effects of revenue diversion on talent allocation and earnings distributions.•Talent allocation across workers and managers depends on earnings across occupations.•In calibrations productivity differences and revenue diversion add to inequality.•Small changes in diversion can account for the 1987-2005 income inequality increase.•With neoclassical production management can divert revenue from labor and capital.