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Is There a Discretion in Wage Setting? A Test Using Takeover Legislation

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  • Marianne Bertrand
  • Sendhil Mullainathan

Abstract

Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels. To test this belief, we examine the wage impact of antitakeover legislation passed throughout the 1980s in many states. Since many view hostile takeovers as an important disciplining device, these laws, by reducing takeover threats, potentially raised managerial discretion. If uncontrolled managers pay higher wages, we expect wages to rise following these laws. Using firm-level data, we find that these laws raised annual wages by 1% to 2%, or about $500 per year. The findings are robust to a battery of specification checks and do not appear to be contaminated by the political economy of the laws or other sources of bias. These results challenge standard theories of wage determination that ignore the role of managerial preferences.

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  • Marianne Bertrand & Sendhil Mullainathan, 1999. "Is There a Discretion in Wage Setting? A Test Using Takeover Legislation," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 535-554, Autumn.
    • Handle: RePEc:rje:randje:v:30:y:1999:i:autumn:p:535-554
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    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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