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

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  • Vicente Cuñat
  • Maria Guadalupe

Abstract

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.

Suggested Citation

  • Vicente Cuñat & Maria Guadalupe, 2009. "Globalization and the provision of incentives inside the firm: The effect of foreign competition," Economics Working Papers 1134, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1134
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    More about this item

    Keywords

    Incentives; Performance-related-pay; Wage Structure; Promotions; Demand for talent; 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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