Executive Labor Market Segmentation: How Local Market Density Affects Incentives and Performance

55 Pages Posted: 12 Apr 2015 Last revised: 27 Sep 2016

Date Written: September 16, 2016

Abstract

I study how the density of executive labor markets affects managerial incentives and thereby firm performance. I find that U.S. executive markets are locally segmented rather than nationally integrated, and that the density of a local market provides executives with non-compensation incentives. Empirical results show that in denser labor markets, executives face stronger performance-based dismissal threats as well as better outside opportunities. These incentives result in higher firm performance in denser markets, especially when executives have longer career horizons. Using state-level variation in the enforceability of non-compete clauses, I find that the positive effects of market density on incentive alignment and firm performance are stronger in markets where executives are freer to move. This evidence further supports the argument that local labor market density works as an external incentive alignment mechanism.

Keywords: Executive labor market; geographic segmentation; local market density; non-compensation incentives; firm performance

JEL Classification: G30; G34; J42

Suggested Citation

Zhao, Hong, Executive Labor Market Segmentation: How Local Market Density Affects Incentives and Performance (September 16, 2016). Available at SSRN: https://ssrn.com/abstract=2593234 or http://dx.doi.org/10.2139/ssrn.2593234

Hong Zhao (Contact Author)

NEOMA Business School

59 Rue Pierre Taittinger
Reims, 51100
France

HOME PAGE: http://sites.google.com/site/hongzhaofinance/

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