Managers, Entrepreneurs, and the Allocation of Talent: Evidence from Hungary's Transition

Miklós Koren and Krisztina Orban

No 2025_2, CEU Working Papers from Department of Economics, Central European University

Abstract: Management quality drives firm performance and aggregate productivity, yet the supply of managerial talent remains poorly understood. A key friction is that hired managers cannot fully appropriate the surplus they generate, unlike entrepreneurs who own their firms, creating a wedge between private and social returns to management. Here we develop a general equilibrium model to quantify how this corporate governance friction distorts talent allocation between entrepreneurship, management, and employment. Using the universe of Hungarian firms and CEOs (1986--2022), we exploit the transition to capitalism—when the count of enterprises increased from 21,000 to 115,000 in three years—to identify the parameters of the model. We find that managers capture only 60% of the surplus they create, resulting in too few professional managers and too many less-productive entrepreneurs. Eliminating this friction would raise GDP per worker by 4% through improved occupational composition. Uniform subsidies fail to correct the misallocation, raising GDP by only 0.1%. Our results show that management interventions' aggregate effects depend critically on targeting the specific friction between hired managers and entrepreneurs rather than expanding the overall pool of business leaders.

Date: 2025-09-30
New Economics Papers: this item is included in nep-ent, nep-sbm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:ceu:econwp:2025_2

DOI: 10.5281/zenodo.17238595

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