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The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment

Author

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  • Ana P. Fernandes
  • Priscila Ferreira
  • L. Alan Winters

Abstract

This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment and exploit its staggered implementation across municipalities for identification. Using employer–employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance-induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.

Suggested Citation

  • Ana P. Fernandes & Priscila Ferreira & L. Alan Winters, 2018. "The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment," Journal of Human Resources, University of Wisconsin Press, vol. 53(3), pages 783-824.
    • Handle: RePEc:uwp:jhriss:v:53:y:2018:i:3:p:783-824
    Note: DOI: 10.3368/jhr.53.3.0215-6963R1
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    File URL: http://jhr.uwpress.org/cgi/reprint/53/3/783
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    Citations

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    Cited by:

    1. Priscila Ferreira, 2019. "Market competition and executive pay," IZA World of Labor, Institute of Labor Economics (IZA), pages 115-115, February.
    2. Cooke, Dudley & Fernandes, Ana P. & Ferreira, Priscila, 2021. "Entry deregulation, firm organization, and wage inequality," International Journal of Industrial Organization, Elsevier, vol. 77(C).
    3. Cheng, Hua & Ding, Siying & Liu, Yongzheng, 2024. "The effectiveness of entry deregulation: Novel evidence from removing minimum capital requirements," Journal of Development Economics, Elsevier, vol. 170(C).
    4. Doreen Akunda & Zhixia Chen & Simon Ndwiga Gikiri, 2018. "Role of HRM in Talent Retention With Evidence," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 9(2), pages 8-19, May.
    5. Andrew E. Hansen-Addy & Davide M. Parrilli & Ishmael Tingbani, 2024. "The impact of trade facilitation on African SMEs’ performance," Small Business Economics, Springer, vol. 62(1), pages 105-131, January.
    6. Cooke, Dudley & Fernandes, Ana P. & Ferreira, Priscila, 2019. "Product market competition and gender discrimination," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 496-522.
    7. Fernandes, Ana P. & Ferreira, Priscila, 2021. "Executives’ gender pay gap and financing constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 381-404.
    8. Yusef Ali Yusef Yakubi & Basuki Basuki & Rudi Purwono & Indrianawati Usman, 2022. "The Impact of Digital Technology and Business Regulations on Financial Inclusion and Socio-Economic Development in Low-Income Countries," SAGE Open, , vol. 12(3), pages 21582440221, August.
    9. Kluge, Jan & Lappoehn, Sarah & Plank, Kerstin, 2020. "The Determinants of Economic Competitiveness," IHS Working Paper Series 24, Institute for Advanced Studies.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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