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Globalization and the Provision of Incentives Inside the Firm

  • Cuñat, Vicente
  • Guadalupe, Maria

This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers in the form of wage structures, promotion profiles, and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labour market outcomes of these workers. We find that higher foreign competition leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing wage increases while lower-ranking executives see their wages fall. Third, higher competition is associated with a higher probability of leaving the firm. Finally, we show that higher foreign competition also is associated with a higher demand for talent at the top of the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5950.

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Date of creation: Nov 2006
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Handle: RePEc:cpr:ceprdp:5950
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  1. Slaughter, Matthew J, 1998. "International Trade and Labour-Market Outcomes: Results, Questions, and Policy Options," Economic Journal, Royal Economic Society, vol. 108(450), pages 1452-62, September.
  2. Ana L. Revenga, 1992. "Exporting Jobs?The Impact of Import Competition on Employment and Wages in U. S. Manufacturing," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 255-284.
  3. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  4. Marin, Dalia & Verdier, Thierry, 2002. "Globalization and the 'New Enterprise'," Discussion Papers in Economics 11, University of Munich, Department of Economics.
  5. Vicente Cuñat & Maria Guadalupe, 2007. "Executive Compensation and Competition in the Banking and Financial Sectors," FMG Discussion Papers dp598, Financial Markets Group.
  6. Kevin J. Murphy, 1986. "Incentives, Learning, and Compensation: A Theoretical and Empirical Investigation of Managerial Labor Contracts," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 59-76, Spring.
  7. Pol Antràs & Luis Garicano & Esteban Rossi-Hansberg, 2006. "Offshoring in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 31-77.
  8. Raghuram G. Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November.
  9. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
  10. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
  11. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics 19894, London School of Economics and Political Science, LSE Library.
  12. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 635-654.
  13. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  14. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  15. repec:hrv:faseco:4784031 is not listed on IDEAS
  16. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
  17. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  18. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
  19. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  20. Maria Guadalupe, 2005. "Product market competition returns to skill and wage inequality," LSE Research Online Documents on Economics 19895, London School of Economics and Political Science, LSE Library.
  21. 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.
  22. John A. Abowd & Thomas Lemieux, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 983-1014.
  23. Benjamin E. Hermalin., 1991. "The Effects of Competition on Executive Behavior," Economics Working Papers 91-182, University of California at Berkeley.
  24. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
  25. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
  26. 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.
  27. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  28. repec:oup:restud:v:64:y:1997:i:2:p:191-213 is not listed on IDEAS
  29. Mark R. Huson, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
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