Information Frictions in the Market for Managerial Talent: Theory and Evidence

This paper studies how information frictions affect managerial hiring strategies across firms. Using Danish administrative data, I document that more productive firms hire more talented trainees and are more likely to promote managers internally. I analyze entry-level hiring using the introduction of an elite business program. Its graduates enter highly productive firms at large premia and become managers there, while pay premia and placement quality decline for graduates from established programs. Motivated by these facts, I model talent competition among heterogeneous firms in the presence of asymmetric employer learning about managerial ability. Information rents from internal labor markets motivate competition for young talent as “hiring for potential”. I estimate the model to quantify the aggregate effects from removing information frictions. More precise initial signals increase talent-to-firm sorting but widen pay dispersion. Full information yields productivity gains of 5–9% across industries, but partial public learning can backfire if training incentives are diminished due to poaching risk and opportunity.