Diverse Organizations and the Competition for Talent∗

Organizations benefit from a diverse composition of skills. The basic premise of this paper is that within the organization, workers of different skills improve the problem-solving ability as the return to adding similar workers is decreasing. We show that when firms compete for talent in the labor market, in equilibrium organizations will differ between each other. We find that organizations with higher Total Factor Productivity (TFP) are larger and hire from a broader range of skills. This implies that there are more levels within the organization hierarchy and that their CEO is more skilled. We also find that the skill distribution in high productivity firms first-order stochastically dominates, implying that there are proportionately fewer workers at each level, i.e. they are leaner at the top, whereas the low productivity firms have a wider base of low skilled workers. Our model provides a benchmark for analyzing diverse organizations in a competitive labor market and how they evolve as the economic environment changes. For example, in our model merger waves lead to downsizing of the original firms firms and an adjustment of the skill distribution. When investment in skills is endogenized, we show that the equilibrium skill distribution has a long right tail, even if ex ante all agents are identical. ∗We would like to thank numerous colleagues and seminar participants for insightful discussions and comments. I