IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article

How Does Product Market Competition Shape Incentive Contracts?

  • Vicente Cuñat

    (Universitat Pompeu Fabra)

  • Maria Guadalupe

    (Columbia University and CEPR)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1542-4774/issues
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 5 (09)
Pages: 1058-1082

as
in new window

Handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1058-1082
Contact details of provider: Web page: http://www.mitpressjournals.org/jeea

Order Information: Web: http://www.mitpressjournals.org/jeea

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
  2. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  3. Hildreth, Andrew K G & Oswald, Andrew J, 1997. "Rent-Sharing and Wages: Evidence from Company and Establishment Panels," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 318-37, April.
  4. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  6. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Oxelheim, Lars & Randoy, Trond, 2004. "The Effects of Internationalization on CEO Compensation," Working Paper Series 611, Research Institute of Industrial Economics.
  8. Kevin J. Murphy & Brian J. Hall, 2000. "Optimal Exercise Prices for Executive Stock Options," American Economic Review, American Economic Association, vol. 90(2), pages 209-214, May.
  9. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
  10. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  11. R. Glenn Hubbard & Darius Palia, 1994. "Executive Pay and Performance: Evidence from the U.S. Banking Industry," NBER Working Papers 4704, National Bureau of Economic Research, Inc.
  12. DeFond, Mark L. & Park, Chul W., 1999. "The effect of competition on CEO turnover1," Journal of Accounting and Economics, Elsevier, vol. 27(1), pages 35-56, February.
  13. Blanchflower, David G & Oswald, Andrew J, 1988. "Profit-Related Pay: Prose Discovered," Economic Journal, Royal Economic Society, vol. 98(392), pages 720-30, September.
  14. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  15. George P. Baker & Brian J. Hall, 1998. "CEO Incentives and Firm Size," NBER Working Papers 6868, National Bureau of Economic Research, Inc.
  16. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  17. Sung Wook Joh, 1999. "Strategic Managerial Incentive Compensation In Japan: Relative Performance Evaluation And Product Market Collusion," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 303-313, May.
  18. Martin, Christopher, 1997. "Price Information in an Open Economy: Theory and Evidence for the United Kingdom, 1951-1991," Economic Journal, Royal Economic Society, vol. 107(444), pages 1391-1404, September.
  19. José E. Galdón-Sánchez & James A. Schmitz Jr., 2002. "Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's," American Economic Review, American Economic Association, vol. 92(4), pages 1222-1235, September.
  20. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  21. Vives, Xavier, 2005. "Innovation and Competitive Pressure," Department of Economics, Working Paper Series qt1s1059vr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  22. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  23. Rachel Griffith, 2001. "Product market competition, efficiency and agency costs: an empirical analysis," IFS Working Papers W01/12, Institute for Fiscal Studies.
  24. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  25. Bruce A. Rayton, 1996. "Firm Performance and Compensation Structure: Performance Elasticities of Average Employee Compensation," Labor and Demography 9607001, EconWPA, revised 15 Apr 1998.
  26. Marianne Bertrand, 2004. "From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 723-766, October.
  27. Bruce A. Rayton & Jonathan S. Seaton, 1996. "The Size of Employee Stakeholding in Large UK Corporations," Labor and Demography 9612001, EconWPA, revised 28 Jan 1999.
  28. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
  29. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 473-489, September.
  30. MacLeod, W Bentley & Malcomson, James M, 1998. "Motivation and Markets," American Economic Review, American Economic Association, vol. 88(3), pages 388-411, June.
  31. Conyon, Martin J & Murphy, Kevin J, 2000. "The Prince and the Pauper? CEO Pay in the United States and United Kingdom," Economic Journal, Royal Economic Society, vol. 110(467), pages F640-71, November.
  32. Coutts, Ken & Norman, Neville R., 2007. "Global influences on UK manufacturing prices: 1970-2000," European Economic Review, Elsevier, vol. 51(5), pages 1205-1221, July.
  33. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
  34. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
  35. Conyon, Martin & Gregg, Paul & Machin, Stephen, 1995. "Taking Care of Business, Executive Compensation in the United Kingdom," Economic Journal, Royal Economic Society, vol. 105(430), pages 704-14, May.
  36. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
  37. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  38. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 1125-1156.
  39. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 205-228.
  40. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 653-691.
  41. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 529-554.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tpr:jeurec:v:3:y:2005:i:5:p:1058-1082. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristin Waites)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.