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Is There Discretion in Wage Setting? A Test Using Takeover Legislation

  • Marianne Bertrand
  • Sendhil Mullainathan

Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels. Testing this popular perception has proven difficult, however, because independent variation in the extent of managerial discretion is needed. In this paper, we use states' passage of anti-takeover legislation as a source of such independent variation. Passed in the 1980's, these laws seriously limited takeovers of firms incorporated in legislating states. Since many view hostile takeovers as an important disciplining device, these laws potentially raised managerial discretion in affected firms. If uncontrolled managers pay higher wages, we expect wages to rise following these laws. Using firm-level data, we find that relative to a control group, annual wages for firms incorporated in states passing laws did indeed rise by 1 to 2% or about $500 per year. The findings are robust to a battery of specification checks and do not appear to be contaminated by the political economy of the laws or other sources of bias. Our results suggest that discretion significantly affects wages. They challenge standard theories of wage determination which ignore the role of managerial preferences.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6807.

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Date of creation: Nov 1998
Date of revision:
Publication status: published as RAND Journal of Economics, Vol. 30, no. 3 (Autumn 1999): 535-554.
Handle: RePEc:nbr:nberwo:6807
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