Economists have shown that large and persistent differences in productivity levels across businesses are ubiquitous. This finding has shaped research agendas in a number of fields, including (but not limited to) macroeconomics, industrial organization, labor, and trade. This paper surveys and evaluates recent empirical work addressing the question of why businesses differ in their measured productivity levels. The causes are manifold, and differ depending on the particular setting. They include elements sourced in production practices—and therefore over which producers have some direct control, at least in theory—as well as from producers' external operating environments. After evaluating the current state of knowledge, I lay out what I see are the major questions that research in the area should address going forward. (JEL D24, G31, L11, M10, O30, O47)

Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades. This increased sensitivity of compensation to performance provides large, successful firms with the glue to retain their managers and the organizational capital embedded in them.

We explore the role the feedback loop between firms' financial health and consumers' demand for their products plays in the auto market. We construct a simple model of an automaker making pricing and debt service (continuation) decisions while recognizing that consumers are sensitive to whether it stays in business. We show that multiple equilibria can exist in such a model, and calibrate it to match stylized facts surrounding GM's recent bankruptcy. The results suggest that while the impact of financial distress on demand substantially reduced GM's profit, bank-run-like multiple equilibria do not appear likely in this market.