Relative Performance Evaluation and Strategic Competition

We examine how relative performance evaluation (RPE) affects industry competition--a question relevant for corporate boards interested in incentivizing executives. Using U.S. airline data, we estimate a dynamic game of competition between heterogeneous firms in an oligopolistic market, with managers incentivized by RPE contracts. While RPE can induce a firm to compete more intensely by smoothing compensation, it also amplifies a firm's cost efficiency relative to its peers and can weaken competition from inefficient firms. The first effect dominates in small markets and the second in median-sized markets. RPE has little effect in large, highly profitable markets.

Keywords: RPE, competition, airlines, structural estimation J.E.L. codes: G34

JEL Classification: G32, G34, L41, L10

Suggested Citation: Suggested Citation

He, Li and Whited, Toni M. and Guo, Ran, Relative Performance Evaluation and Strategic Competition (November 4, 2021). Available at SSRN: https://ssrn.com/abstract=3287143 or http://dx.doi.org/10.2139/ssrn.3287143