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Globalization and the provision of incentives inside the firm: The effect of foreign competition

  • Vicente Cuñat
  • Maria Guadalupe

This paper studies the effect of changes in foreign competition on the structure of compensation and incentives of U.S. executives. We measure foreign competition as import penetration and use tariffs and exchange rates as instrumental variables to estimate its causal effect on pay. 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 increases whithin-firm pay differentials between executive levels, with CEOs typically experiencing the largest wage increases, partly because they receive the steepest incentive contracts. Finally, higher foreign competition is also associated with a higher demand for talent. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1134.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1134.

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Date of creation: Jan 2009
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Handle: RePEc:upf:upfgen:1134
Contact details of provider: Web page: http://www.econ.upf.edu/

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