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Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition

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  • Vicente Cuñat
  • Maria Guadalupe

Abstract

This article studies the effect of changes in foreign competition on the structure of compensation and incentives of U.S. executives. We find that import penetration (instrumented with exchange rates and tariffs) leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it increases within-firm pay differentials between executive levels, with CEOs typically experiencing the largest wage increases. Finally, higher foreign competition is also associated with a higher demand for talent. These results suggest that increased foreign competition can explain some of the recent trends in compensation structures. (c) 2009 by The University of Chicago. All rights reserved.

Suggested Citation

  • Vicente Cuñat & Maria Guadalupe, 2009. "Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition," Journal of Labor Economics, University of Chicago Press, vol. 27(2), pages 179-212, April.
  • Handle: RePEc:ucp:jlabec:v:27:y:2009:i:2:p:179-212
    DOI: 10.1086/599817
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    More about this item

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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