Human Capital, Complex Technologies, Firm Size and Wages: A Test of the O-Ring Production Hypotheses
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Kremer’s O-Ring production theory (QJE, 1993) describes a process in which a
single mistake in any one of several tasks in firm’s production process can lead to
catastrophic failure of the product’s value. This paper tests the predictions of the O-Ring
theory in the context of a single market for a relatively homogeneous product: hog
production. Consistent with the theory, the most skilled workers concentrate in the
largest and most technologically advanced farms and are paid more. As with observed
skills, workers with the greatest endowments of unobserved skills also sort themselves
into the largest and most technology intensive farms.