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Managerial incentives and compensation in a global market

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  • Wu, Yanhui

Abstract

This paper embeds a principal-agent firm in an otherwise standard trade model a la Melitz (2003) to investigate the impact of globalization on the provision of managerial incentives and on the distribution of managerial compensation. Facing contractual frictions due to limited liability, firms with heterogeneous productivity endogenously sort into different pay structures to mitigate different levels of agency problems. More productive firms use a higher-powered incentive contract while less productive firms use a lowered- powered one. International trade within an industry enhances market competition, inducing resources reallocated from low productivity domestic firms to high productivity exporting .rms. The uneven effects of international trade on firms that differ in their exporting status and pay structure result in more prevalence of high-powered incentive pay, a larger wage gap between managers and production workers, and a higher level of wage inequality among managers.

Suggested Citation

  • Wu, Yanhui, 2011. "Managerial incentives and compensation in a global market," LSE Research Online Documents on Economics 121919, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121919
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    File URL: http://eprints.lse.ac.uk/121919/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    trade; heterogeneous firms; pay contracts; managerial incentives; managerial compensation; wage inequality;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • F1 - International Economics - - Trade
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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