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How Does Product Market Competition Shape Incentive Contracts?

Author

Listed:
  • Vicente Cuñat

    (Universitat Pompeu Fabra)

  • Maria Guadalupe

    (Columbia University and CEPR)

Abstract

This paper studies the effect of product market competition on the explicit compensation packages that firms offer to their CEOs, executives and workers. We use a large sample of both traded and nontraded UK firms and exploit a quasi-natural experiment associated to an increase in competition. The sudden appreciation of the pound in 1996 implied different changes in competition for sectors with different degrees of openness. Our difference in differences estimates show that a higher level of product market competition increases the performance pay sensitivity of compensation schemes, in particular for executives. (JEL: J33, L20, G34) Copyright (c) 2005 by the European Economic Association.

Suggested Citation

  • Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, September.
  • Handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1058-1082
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    More about this item

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J49 - Labor and Demographic Economics - - Particular Labor Markets - - - Other

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