Competition and Pay Inequality Within and Between Firms

64 Pages Posted: 13 Jun 2019

Date Written: May 30, 2019

Abstract

How does market competition affect pay inequality between and within firms? Using division managers as a pool of similar workers and the Canada-US Free Trade Agreement, we find that greater competition increases overall pay inequality between, but not within, firms. This null effect within firms is not driven by lack of statistical power. Instead, we find that it predominates within subsamples of firms with higher predicted levels of social comparison. Further, increased competition leads to greater pay-performance sensitivity among the higher-paid managers within firms, while it leads to greater overpayment among the others. These last results are consistent with firm principals increasing incentive strength of their best managers, and overpaying the rest. Altogether, this study suggests that, while competition leads to greater pay inequality overall, principals aim to maintain equality within firms, and do so through the differential provision of incentives among employees.

Keywords: pay inequality, social comparison, executive compensation, competition

Suggested Citation

Gartenberg, Claudine Madras and Wulf, Julie M., Competition and Pay Inequality Within and Between Firms (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3396689 or http://dx.doi.org/10.2139/ssrn.3396689

Claudine Madras Gartenberg (Contact Author)

Wharton ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
2158987755 (Phone)

Julie M. Wulf

Harvard Business School ( email )

Harvard Business School
Boston, MA
United States

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