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

33 Pages Posted: 7 Apr 2009

See all articles by Vicente Cuñat

Vicente Cuñat

London School of Economics & Political Science (LSE) - Financial Markets Group

Maria Guadalupe

INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Date Written: January 7, 2009

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.

Keywords: Incentives, Performance-related-pay, Wage Structure, Promotions, Demand for talent, Globalization, Product Market Competition, NGN, charging principles

JEL Classification: M52, L1, J31

Suggested Citation

Cuñat, Vicente and Guadalupe, Maria, Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition (January 7, 2009). Available at SSRN: https://ssrn.com/abstract=1374263 or http://dx.doi.org/10.2139/ssrn.1374263

Vicente Cuñat (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://www.vicentecunat.com

Maria Guadalupe

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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