Relative Performance Evaluation and Strategic Competition

45 Pages Posted: 26 Nov 2018

See all articles by Li He

Li He

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Ran Guo

Lancaster University

Date Written: November 19, 2018

Abstract

This paper examines how the use of relative performance evaluation (RPE) affects industry competition. Using data from the U.S. airline industry, we estimate a dynamic game of competition with heterogenous firms in an oligopolistic market with the presence of RPE contracts. As is standard, RPE makes CEO compensation less sensitive to market conditions. Therefore, the CEO's propensity to operate in a given market is determined by a tradeoff arises between the reduction in compensation based on market conditions and the gain from being compared to competing agents. The estimation results show that the use of RPE decreases a firm's tendency to be active under bad market conditions by 10.1%. Conversely, the tendency to be active rises in good market conditions by 12.4%. These effects are stronger for firms with lower fixed operating costs.

Keywords: relative performance evaluation, entry and exit, competition

JEL Classification: G32, G34, L41, L10

Suggested Citation

He, Li and Whited, Toni M. and Guo, Ran, Relative Performance Evaluation and Strategic Competition (November 19, 2018). Available at SSRN: https://ssrn.com/abstract=3287143 or http://dx.doi.org/10.2139/ssrn.3287143

Li He

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands
+31 10 4082590 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/li-he/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ran Guo

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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