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The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment

The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural... <p>ABSTRACT:</p><p>This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment and exploit its staggered implementation across municipalities for identification. Using employer–employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance-induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.</p> http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Human Resources University of Wisconsin Press

The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment

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Publisher
University of Wisconsin Press
Copyright
©by the Board of Regents of the University of Wisconsin System
ISSN
1548-8004

Abstract

<p>ABSTRACT:</p><p>This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment and exploit its staggered implementation across municipalities for identification. Using employer–employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance-induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.</p>

Journal

Journal of Human ResourcesUniversity of Wisconsin Press

Published: Jul 3, 2018

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