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

Author

Listed:
  • Cuñat, Vicente

    (London School of Economics)

  • Guadalupe, Maria

    (INSEAD)

Abstract

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.

Suggested Citation

  • Cuñat, Vicente & Guadalupe, Maria, 2006. "Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition," IZA Discussion Papers 2408, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2408
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    More about this item

    Keywords

    foreign competition; demand for talent; promotions; job turnover; wage ladders; wage structure; performance-related-pay; incentives; globalization; product market competition;
    All these keywords.

    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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