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Product Market Competition, Managerial Compensation, and Firm Size in Market Equilibrium

Author

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  • Ajay Subramanian

    (Risk Management and Insurance, Robinson College of Business, Georgia State University, Atlanta, Georgia 30303)

Abstract

We develop a tractable equilibrium model of competing firms in an industry to show how the distribution of firm qualities, moral hazard, and product market characteristics interact to affect firm size, managerial compensation, and market structure. Different determinants of product market competition have contrasting effects on firm size and managerial compensation. Although both firm size and managerial compensation increase with the entry cost, they increase with the elasticity of substitution if and only if firm size exceeds a high threshold but decrease if it is below a low threshold. Aggregate shocks to the firm productivity distribution affect incentives in our equilibrium framework. We show statistically and economically significant empirical support for several hypotheses derived from the theory that relates product market characteristics to managerial compensation, firm size, and the number of firms in the industry. Different determinants of competition indeed have contrasting effects, as predicted by the theory. This paper was accepted by Brad Barber, finance.

Suggested Citation

  • Ajay Subramanian, 2013. "Product Market Competition, Managerial Compensation, and Firm Size in Market Equilibrium," Management Science, INFORMS, vol. 59(7), pages 1612-1630, July.
    • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:7:p:1612-1630
    DOI: 10.1287/mnsc.1120.1650
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    References listed on IDEAS

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    Cited by:

    1. Jung, Hae Won (Henny) & Subramanian, Ajay, 2021. "Search, product market competition and CEO pay," Journal of Corporate Finance, Elsevier, vol. 69(C).
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    5. Joël Hellier, 2026. "Asymmetric cultural globalization, top performers’ income and inequality," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 50(2), pages 343-369, June.
    6. Gersbach, Hans & Schmutzler, Armin, 2014. "Does globalization create superstars? A simple theory of managerial wages," European Economic Review, Elsevier, vol. 71(C), pages 34-51.
    7. Joël Hellier, 2022. "Asymmetric Globalization and Top Performers Income," Working Papers REM 2022/0242, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    8. Joel Hellier, 2023. "Asymmetric Globalization, Top Performers’ Income and Inequality," Working Papers 634, ECINEQ, Society for the Study of Economic Inequality.
    9. Jung, Hae Won (Henny) & Subramanian, Ajay, 2017. "CEO talent, CEO compensation, and product market competition," Journal of Financial Economics, Elsevier, vol. 125(1), pages 48-71.
    10. Lihua Sun & Chunguang Bai & Joseph Sarkis, 2024. "Reward or punishment? The impact of heterogeneous environmental regulatory intervention on the firm market value," Business Strategy and the Environment, Wiley Blackwell, vol. 33(5), pages 4004-4023, July.
    11. Joel HELLIER, 2021. "Globalization and Inequality in Advanced Economies: A Provisional Assessment," Working Papers 575, ECINEQ, Society for the Study of Economic Inequality.

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