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Managerial Incentives and Compensation in a Global Market

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  • Yanhui Wu
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    Abstract

    This paper embeds a principal-agent firm in an otherwise standard trade model a la Melitz (2003) to investigate the impact of globalization on the provision of managerial incentives and on the distribution of managerial compensation. Facing contractual frictions due to limited liability, firms with heterogeneous productivity endogenously sort into different pay structures to mitigate different levels of agency problems. More productive firms use a higher-powered incentive contract while less productive firms use a lowered- powered one. International trade within an industry enhances market competition, inducing resources reallocated from low productivity domestic firms to high productivity exporting .rms. The uneven effects of international trade on firms that differ in their exporting status and pay structure result in more prevalence of high-powered incentive pay, a larger wage gap between managers and production workers, and a higher level of wage inequality among managers.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1066.

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    Date of creation: Aug 2011
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    Handle: RePEc:cep:cepdps:dp1066

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

    Related research

    Keywords: trade; heterogeneous firms; pay contracts; managerial incentives; managerial compensation; wage inequality;

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