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How Does Product Market Competition Shape Incentive Contracts?

  • Vicente Cuñat
  • María Guadalupe

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 non-traded 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.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0687.

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Date of creation: May 2005
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Handle: RePEc:cep:cepdps:dp0687
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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