Product Market Competition, Managerial Compensation, and Firm Size in Market Equilibrium

Ajay Subramanian ()
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Ajay Subramanian: Risk Management and Insurance, Robinson College of Business, Georgia State University, Atlanta, Georgia 30303

Management Science, 2013, vol. 59, issue 7, 1612-1630

Abstract: We develop a tractable equilibrium model of competing firms in an industry to show how the distribution of firm qualities, moral hazard, and product market characteristics interact to affect firm size, managerial compensation, and market structure. Different determinants of product market competition have contrasting effects on firm size and managerial compensation. Although both firm size and managerial compensation increase with the entry cost, they increase with the elasticity of substitution if and only if firm size exceeds a high threshold but decrease if it is below a low threshold. Aggregate shocks to the firm productivity distribution affect incentives in our equilibrium framework. We show statistically and economically significant empirical support for several hypotheses derived from the theory that relates product market characteristics to managerial compensation, firm size, and the number of firms in the industry. Different determinants of competition indeed have contrasting effects, as predicted by the theory. This paper was accepted by Brad Barber, finance.

Keywords: product market competition; managerial compensation; firm size; market equilibrium (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:59:y:2013:i:7:p:1612-1630

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