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

Journal of Labor Economics, Vol. 27, No. 2, pp. 179-212, 2009

34 Pages Posted: 22 Oct 2011

See all articles by Maria Guadalupe

Maria Guadalupe

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

Vicente Cuñat

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

Multiple version iconThere are 3 versions of this paper

Date Written: April 2009

Abstract

This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers in the form of wage structures, promotion premia, and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labor market outcomes of these workers. 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 and it does so more the higher up the executive is in the firm hierarchy. Second, it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing the largest wage increases, partly because they receive the steepest incentive contracts. Third, we show that higher foreign competition also is associated with a higher demand for talent at the top of the firm. Finally, higher competition is associated with a higher probability of leaving the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

Suggested Citation

Guadalupe, Maria and Cuñat, Vicente, Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition (April 2009). Journal of Labor Economics, Vol. 27, No. 2, pp. 179-212, 2009 . Available at SSRN: https://ssrn.com/abstract=1947006

Maria Guadalupe (Contact Author)

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

Vicente Cuñat

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

Houghton Street
London WC2A 2AE
United Kingdom

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

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