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Product Market Competition and Executive Compensation: An Empirical Investigation

Author

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  • Patricia Funk
  • Gabrielle Wanzenried

Abstract

There is an ongoing theoretical debate about whether firm-owners would optimally use stronger or weaker incentive schemes for their managers as productmarket competition increases. Schmidt (1997) shows that the outside options of the managers play a crucial role: if the market for managers is soft, an increase in competition is more likely to result in stronger incentive schemes than if the market for managers is tough. In this paper, we for the first time analyze the effects of product market competition on the level and structure of executive compensation. With panel-data for firms in the the U.S. manufacturing industries (NAICS 32-33), we investigate (a) how an increase in product market competition affects the use of incentive contracts and (b) whether this relationship depends on the outside options of the managers as predicted by theory.

Suggested Citation

  • Patricia Funk & Gabrielle Wanzenried, 2003. "Product Market Competition and Executive Compensation: An Empirical Investigation," Diskussionsschriften dp0309, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp0309
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    References listed on IDEAS

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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    3. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-1177, December.
    4. George P. Baker & Brian J. Hall, 1998. "CEO Incentives and Firm Size," NBER Working Papers 6868, National Bureau of Economic Research, Inc.
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    6. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Stefan Beiner & Markus Schmid & Gabrielle Wanzenried, 2004. "Product Market Competition, Managerial Inventives, and Firm Valuation," Diskussionsschriften dp0412, Universitaet Bern, Departement Volkswirtschaft.

    More about this item

    Keywords

    CEO compensation; product market competition; incentive schemes;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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