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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
Published online before print April 19, 2017, 0215-6963R1; 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). Email: . 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). Email: . 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). Email: . 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.

Key Words
  • Entry Deregulation
  • Executive Compensation
  • Managerial Incentives
  • Performance-related Pay
  • Product Market Competition
JEL Classification
  • J31
  • J33

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Journal of Human Resources: 58 (3)
Journal of Human Resources
Vol. 58, Issue 3
1 May 2023
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The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment
Ana P. Fernandes, Priscila Ferreira, L. Alan Winters
Journal of Human Resources Apr 2017, 0215-6963R1; DOI: 10.3368/jhr.53.3.0215-6963R1

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The Effect of Competition on Executive Compensation and Incentives: Evidence from a Quasi-natural Experiment
Ana P. Fernandes, Priscila Ferreira, L. Alan Winters
Journal of Human Resources Apr 2017, 0215-6963R1; DOI: 10.3368/jhr.53.3.0215-6963R1
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Keywords

  • Entry Deregulation
  • Executive Compensation
  • Managerial Incentives
  • Performance-related Pay
  • Product Market Competition
  • J31
  • J33
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