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Career Concerns and Product Market Competition

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  • Fabio Feriozzi

Abstract

This paper studies the effect of increased competition in the product market on managerial incentives. I propose a simple model of career concerns where firms are willing to pay for managerial talent to reduce production costs, but also to subtract talented executives from competitors. This second effect is privately valuable to firms, but is socially wasteful. As a result, equilibrium pay for talent can be inefficiently high and career concerns too strong. Explicit incentive contracts do not solve the problem, but equilibrium pay is reduced if managerial skills have firm‐specific components, or if firms are heterogeneous. In this second case, managers are efficiently assigned to firms, but equilibrium pay reflects the profitability of talent outside the efficient allocation. The effect of increased competition is ambiguous in general, and depends on the profit sensitivity to cost reductions. This ambiguity is illustrated in two examples of commonly used models of imperfect competition.

Suggested Citation

  • Fabio Feriozzi, 2016. "Career Concerns and Product Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 370-399, April.
  • Handle: RePEc:bla:jemstr:v:25:y:2016:i:2:p:370-399
    DOI: 10.1111/jems.12133
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    File URL: https://doi.org/10.1111/jems.12133
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    References listed on IDEAS

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    1. Cuñat, Vicente & Guadalupe, Maria, 2009. "Executive compensation and competition in the banking and financial sectors," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 495-504, March.
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    10. BÃ¥rd Harstad, 2007. "Organizational Form and the Market for Talent," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 581-611.
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    13. Jen Baggs & Jean‐Etienne de Bettignies & John Ries, 2013. "Product Market Competition and Returns to Talent," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 569-593, September.
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