IDEAS home Printed from https://ideas.repec.org/p/ecm/wc2000/1411.html
   My bibliography  Save this paper

Prediction Ability

Author

Listed:
  • Katsuya Takii

    (University of Essex)

Abstract

This paper models managerial human capital as the ability to predict future events. My assignment model shows that a manager who has high prediction ability goes into a risky industry, because risk increases the marginal productivity of prediction ability. This conclusion contrasts with that of Lucas (1978). In Lucas's model talented managers simply manage bigger firms. The data supports my view: talented B-school graduates choose to work in risky industries, and the correlation between an ability measure and a risk measure is 0.75. The simulated assignment model fits B-school placement data quite well, and a 1 percent increase in the GMAT score of a B-school graduate implies a 158 percent increase in the risk of the firm to which the graduate is assigned. I also employ a dynamic analysis, which shows that prediction ability increases a firm's expected Tobin's Q and allows a firm to attain a higher expected growth rate. The COMPUSTAT dataset confirms these points as well.

Suggested Citation

  • Katsuya Takii, 2000. "Prediction Ability," Econometric Society World Congress 2000 Contributed Papers 1411, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1411
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/RePEc/es2000/1411.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Takii, Katsuya, 2000. "Prediction ability and investment under uncertainty," Economics Discussion Papers 9991, University of Essex, Department of Economics.
    2. Welch, F, 1970. "Education in Production," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 35-59, Jan.-Feb..
    3. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-442, June.
    4. Katsuya Takii, 2003. "Prediction Ability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 80-98, January.
    5. Takii, Katsuya, 2000. "Risk and prediction ability," Economics Discussion Papers 9990, University of Essex, Department of Economics.
    6. Ann P. Bartel & Nachum Sicherman, 1999. "Technological Change and Wages: An Interindustry Analysis," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 285-325, April.
    7. Gretsky, Neil E. & Ostroy, Joseph M. & Zame, William R., 1999. "Perfect Competition in the Continuous Assignment Model," Journal of Economic Theory, Elsevier, vol. 88(1), pages 60-118, September.
    8. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    9. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-880, June.
    10. Michel Demers, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information Over Time," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 333-350.
    11. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
    12. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    13. Schultz, Theodore W, 1975. "The Value of the Ability to Deal with Disequilibria," Journal of Economic Literature, American Economic Association, vol. 13(3), pages 827-846, September.
    14. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-461, June.
    15. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    16. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
    17. Huntley Schaller & Fanny Demers & Michel Demers, 1993. "Investments Under Uncertainty and Irreversibility," Carleton Economic Papers 93-10, Carleton University, Department of Economics, revised Sep 1990.
    18. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-1120, December.
    19. Holmes, Thomas J & Schmitz, James A, Jr, 1990. "A Theory of Entrepreneurship and Its Application to the Study of Business Transfers," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 265-294, April.
    20. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    21. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    22. Kihlstrom, Richard E, 1974. "A Bayesian Model of Demand for Information About Product Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 99-118, February.
    23. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 147-171, April.
    24. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Katsuya Takii, 2007. "The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms," Discussion Papers in Economics and Business 07-10, Osaka University, Graduate School of Economics.
    2. Takii, Katsuya, 2008. "Fiscal policy and entrepreneurship," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 592-608, March.
    3. Takii, Katsuya & Sasaki, Masaru & Wan, Junmin, 2020. "Synchronized job transfer and task-specific human capital," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).
    4. Ueda, Masako & Li, Fei, 2005. "CEO-Firm Match and Principal-Agent Problem," CEPR Discussion Papers 5119, C.E.P.R. Discussion Papers.
    5. Katsuya Takii, 2009. "Entrepreneurial competition and its impact on the aggregate economy," Journal of Economics, Springer, vol. 97(1), pages 1-18, May.
    6. Masaru Sasaki & Katsuya Takii & Junmin Wan, 2012. "Horizontal Transfer and Promotion: New Evidence and an Interpretation from the Perspective of Task-Specific Human Capital," OSIPP Discussion Paper 12E006, Osaka School of International Public Policy, Osaka University.
    7. Takii, Katsuya, 2007. "The value of adaptability--Through the analysis of a firm's prediction ability," Journal of Economics and Business, Elsevier, vol. 59(2), pages 144-162.
    8. Larrisa V. Shavinina, 2011. "What Do We Know About Managerial Talent? The Case-Study of Richard Branson as a Great Project Manager," RePAd Working Paper Series UQO-DSA-wp2102011, Département des sciences administratives, UQO.
    9. Takanori Adachi & Takao Asano, 2011. "Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints," KIER Working Papers 803, Kyoto University, Institute of Economic Research.
    10. Takii, Katsuya, 2000. "Prediction ability and investment under uncertainty," Economics Discussion Papers 9991, University of Essex, Department of Economics.
    11. Katsuya Takii, 2004. "Entrepreneurial Efficiency: An Empirical Framework and Evidence," Macroeconomics 0411006, University Library of Munich, Germany.
    12. Katsuya Takii, 2011. "Entrepreneurial Efficiency: Theory," The Japanese Economic Review, Japanese Economic Association, vol. 62(2), pages 196-214, June.
    13. Katsuya Takii, 2004. "Entrepreneurial Efficiency," Macroeconomics 0406007, University Library of Munich, Germany.
    14. Katsuya Takii, 2004. "The Value of Adaptability," Industrial Organization 0406004, University Library of Munich, Germany.
    15. Katsuya Takii, 2003. "Prediction Ability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 80-98, January.
    16. Katsuya Takii, 2008. "The Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms in a Rapidly Changing Environment," OSIPP Discussion Paper 08E003, Osaka School of International Public Policy, Osaka University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Faria, Andre L., 2008. "Mergers and the market for organization capital," Journal of Economic Theory, Elsevier, vol. 138(1), pages 71-100, January.
    2. Katsuya Takii, 2004. "Entrepreneurial Efficiency," Macroeconomics 0406007, University Library of Munich, Germany.
    3. Katsuya Takii, 2004. "Entrepreneurial Efficiency: An Empirical Framework and Evidence," Macroeconomics 0411006, University Library of Munich, Germany.
    4. Rui Baptista & Francisco Lima & Miguel Preto, 2013. "Entrepreneurial skills and workers’ wages in small firms," Small Business Economics, Springer, vol. 40(2), pages 309-323, February.
    5. Alexander Monge-Naranjo, 2012. "Knowledge Spillovers and The Optimal Taxation of Multinational Firms," 2012 Meeting Papers 593, Society for Economic Dynamics.
    6. Alexander Monge-Naranjo, 2016. "Openness and the Optimal Taxation of Foreign Know-How," Working Papers 2016-20, Federal Reserve Bank of St. Louis.
    7. Penn State University & Alexander Monge-Naranjo, 2011. "Foreign Firms and the Diffusion of Know-How," 2011 Meeting Papers 1324, Society for Economic Dynamics.
    8. Derek Neal & Sherwin Rosen, 1998. "Theories of the Distribution of Labor Earnings," NBER Working Papers 6378, National Bureau of Economic Research, Inc.
    9. Alexander Monge-Naranjo, 2012. "Foreign firms and the diffusion of knowledge," Working Papers 2012-055, Federal Reserve Bank of St. Louis.
    10. Takii, Katsuya, 2007. "The value of adaptability--Through the analysis of a firm's prediction ability," Journal of Economics and Business, Elsevier, vol. 59(2), pages 144-162.
    11. Erzo G.J. Luttmer, 2010. "Models of Growth and Firm Heterogeneity," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 547-576, September.
    12. Kunal Dasgupta, 2009. "Learning, Knowledge Diffusion and the Gains from Globalization," Working Papers tecipa-364, University of Toronto, Department of Economics.
    13. Frederiksen, Anders & Poulsen, Odile, 2010. "Increasing Income Inequality: Productivity, Bargaining and Skill-Upgrading," IZA Discussion Papers 4791, Institute of Labor Economics (IZA).
    14. Luis Garicano & Esteban Rossi-Hansberg, 2015. "Knowledge-Based Hierarchies: Using Organizations to Understand the Economy," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 1-30, August.
    15. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 31-77.
    16. James A. Schmitz, 1993. "Early progress on the \\"problem of economic development\\"," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 17(Spr), pages 17-35.
    17. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133, Elsevier.
    18. Xu, Jianhuan, 2017. "Growing through the merger and acquisition," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 54-74.
    19. Katsuya Takii, 2011. "Entrepreneurial Efficiency: Theory," The Japanese Economic Review, Japanese Economic Association, vol. 62(2), pages 196-214, June.
    20. Ariel T. Burstein & Alexander Monge-Naranjo, 2009. "Foreign Know-How, Firm Control, and the Income of Developing Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 149-195.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1411. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.