Trade, Technologies, and the Evolution of Corporate Governance

Abstract

This paper develops an analytical framework to study how corporate governance is shaped by product market globalization and technological progress. Using U.S. firm and industry level data, I first document two empirical patterns. First, higher levels of industry trade openness and productivity are associated with higher levels of competition for managerial talent. Second, U.S. firms choose weaker governance rules when the labor market for managerial talent becomes more competitive. To explain these patterns in a theoretical framework, I introduce agency problems at the firm level into a general equilibrium open economy model with firm- and manager-heterogeneity. Trade and technological progress increase the competition for managers and thus lead to managerial superstar effects such that reservation wages for the most talented managers in the economy increase. This affects the agency problems inside firms and endogenously induces firms to create incentives with performance payments instead of tight governance. Consistently with the empirical observations, comparative statics exercises suggest that trade integration and technological progress can erode the average quality of firm governance and increase CEO compensation in the economy due to these managerial superstar effects.

Keywords: agency problems in international trade, international trade and firm organization, endogenous managerial entrenchment, corporate governance and CEO compensation

JEL Classification: F1, F16, G34, J33, L22, O33