Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition

Vicente Cuñat () and Maria Guadalupe ()

No 2408, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers in the form of wage structures, promotion profiles, and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labor market outcomes of these workers. We find that higher foreign competition leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing wage increases while lowerranking executives see their wages fall. Third, higher competition is associated with a higher probability of leaving the firm. Finally, we show that higher foreign competition also is associated with a higher demand for talent at the top of the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

Keywords: incentives; performance-related-pay; wage structure; wage ladders; job turnover; promotions; demand for talent; foreign competition; globalization; product market competition (search for similar items in EconPapers)
JEL-codes: M52 L1 J31 (search for similar items in EconPapers)
Date: 2006-10
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Related works:
Working Paper: Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition (2009)
Journal Article: Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition (2009)
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