Do frictions matter in the market for chief executives?

We answer recent research calls for theoretical work in two areas: adding frictions to assignment models; and developing dynamic equilibrium models that permit study of issues such as rent extraction. We develop a dynamic equilibrium model of executive employment with search frictions. In the empirical application, all the mechanisms are estimated and can potentially be rejected by the data. Most of compensation growth is explained by pay for luck--the ability of incumbent CEOs to appropriate additional match surplus. Other things equal, headhunting and managerial power account for 20% and 30% of steady state growth in compensation. Overall, search frictions decrease output by 42% relative to the benchmark frictionless equilibrium.