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

  • Cuñat, Vicente

    ()

    (London School of Economics)

  • Guadalupe, Maria

    ()

    (INSEAD)

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 labor 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2408.

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Length: 40 pages
Date of creation: Oct 2006
Date of revision:
Publication status: published in: Journal of Labor Economics, 2009, 27 (2), 179-212
Handle: RePEc:iza:izadps:dp2408
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  1. Vicente Cuñat & Maria Guadalupe, 2007. "Executive Compensation and Competition in the Banking and Financial Sectors," FMG Discussion Papers dp598, Financial Markets Group.
  2. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
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  7. 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.
  8. Richard Baldwin, 1988. "Hysteresis In Import Prices: The Beachhead Effect," NBER Working Papers 2545, National Bureau of Economic Research, Inc.
  9. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
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  14. John M. Abowd & Laurence Allain, 1996. "Compensation Structure and Product Market Competition," NBER Working Papers 5493, National Bureau of Economic Research, Inc.
  15. 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.
  16. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
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  18. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the new enterprise," Munich Reprints in Economics 19256, University of Munich, Department of Economics.
  19. Schmalensee, Richard., 1987. "Inter-industry studies of structure and performance," Working papers 1874-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  20. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May.
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  29. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2007. "Performance Pay and Wage Inequality," NBER Working Papers 13128, National Bureau of Economic Research, Inc.
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  38. 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.
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