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Research ArticleArticle

The Effect of Competition on Executive Compensation and Incentives

Evidence from a Quasi-natural Experiment

Ana P. Fernandes, Priscila Ferreira and L. Alan Winters
Journal of Human Resources, July 2018, 53 (3) 783-824; DOI: https://doi.org/10.3368/jhr.53.3.0215-6963R1
Ana P. Fernandes
Ana P. Fernandes is a senior lecturer at the University of Exeter, United Kingdom. Priscila Ferreira is assistant professor of economics at the University of Minho (Portugal) and research fellow at NIMA. L. Alan Winters is a professor of economics at the University of Sussex (United Kingdom) and research fellow at CEPR, GDN, and IZA.
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Priscila Ferreira
Ana P. Fernandes is a senior lecturer at the University of Exeter, United Kingdom. Priscila Ferreira is assistant professor of economics at the University of Minho (Portugal) and research fellow at NIMA. L. Alan Winters is a professor of economics at the University of Sussex (United Kingdom) and research fellow at CEPR, GDN, and IZA.
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L. Alan Winters
Ana P. Fernandes is a senior lecturer at the University of Exeter, United Kingdom. Priscila Ferreira is assistant professor of economics at the University of Minho (Portugal) and research fellow at NIMA. L. Alan Winters is a professor of economics at the University of Sussex (United Kingdom) and research fellow at CEPR, GDN, and IZA.
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Abstract

This paper studies the effect of increased product market competition on executive compensation and incentives. We use a reform that simplified firm entry regulation in Portugal as a quasi-natural experiment and exploit its staggered implementation across municipalities for identification. Using employer–employee data, we find that increased competition following the reform raised total pay but reduced the sensitivity of pay to firm performance. This is consistent with theoretical results showing that a fall in entry costs weakens managerial incentive provision. Entry deregulation also increased performance-induced CEO turnover and firms’ probability of exit, suggesting that competition provides direct incentives for managerial effort.

JEL Classification
  • J31
  • J33
  • Received February 2015.
  • Accepted March 2017.

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Journal of Human Resources: 53 (3)
Journal of Human Resources
Vol. 53, Issue 3
1 Jul 2018
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The Effect of Competition on Executive Compensation and Incentives
Ana P. Fernandes, Priscila Ferreira, L. Alan Winters
Journal of Human Resources Jul 2018, 53 (3) 783-824; DOI: 10.3368/jhr.53.3.0215-6963R1

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The Effect of Competition on Executive Compensation and Incentives
Ana P. Fernandes, Priscila Ferreira, L. Alan Winters
Journal of Human Resources Jul 2018, 53 (3) 783-824; DOI: 10.3368/jhr.53.3.0215-6963R1
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Keywords

  • J31
  • J33
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