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Globalization and the provision of incentives inside the firm: The effect of foreign competition

Vicente Cuñat () and Maria Guadalupe ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper studies the effect of changes in foreign competition on the structure of compensation and incentives of U.S. executives. We measure foreign competition as import penetration and use tariffs and exchange rates as instrumental variables to estimate its causal effect on pay. 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 increases whithin-firm pay differentials between executive levels, with CEOs typically experiencing the largest wage increases, partly because they receive the steepest incentive contracts. Finally, higher foreign competition is also associated with a higher demand for talent. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

Keywords: Incentives; Performance-related-pay; Wage Structure; Promotions; Demand for talent; Globalization; Product Market Competition (search for similar items in EconPapers)
JEL-codes: J31 L1 M52 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-lab and nep-mic
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Related works:
Journal Article: Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition (2009) Downloads
Working Paper: Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition (2006) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1134

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