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Employee Bargaining Power, Inter-Firm Competition, and Equity-Based Compensation

75 Pages Posted: 22 Jun 2014 Last revised: 21 Nov 2017

Francesco Bova

University of Toronto - Rotman School of Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: August 29, 2016

Abstract

We develop a model to illustrate that employee compensation and product market decisions are related. When the product market is competitive and employees have low bargaining power, the unique equilibrium in our setting is for each firm's owners to offer equity-based compensation to their employees. In this setting, equity-based compensation leads to a lower wage rate, which makes each firm more competitive with its rival. However, this unique equilibrium is a Prisoner’s Dilemma for each firms’ original owners. Our results are consistent with several empirical regularities and provide predictions on when firms will offer equity-based compensation to their employees.

Keywords: equity-based compensation, competition, employee bargaining power

JEL Classification: M41, J30, J33

Suggested Citation

Bova, Francesco and Yang, Liyan, Employee Bargaining Power, Inter-Firm Competition, and Equity-Based Compensation (August 29, 2016). Journal of Financial Economics (JFE), Vol. 126, No. 2, 2017; Rotman School of Management Working Paper No. 2457305. Available at SSRN: https://ssrn.com/abstract=2457305 or http://dx.doi.org/10.2139/ssrn.2457305

Francesco Bova (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3985 (Phone)

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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