Executive compensation and competitive pressure in the product market: How does firm entry shape managerial incentives?
Kaniska Dam, Profesor Investigador Titular de la División de Economía del CIDE, y Alejandro Robinson-Cortés escribieron el artículo Executive compensation and competitive pressure in the product market: How does firm entry shape managerial incentives? publicado en la revista Mathematical Social Sciences.
Motivated by empirical evidence, we develop an incentive contracting model under oligopolistic competition to study how incumbent firms adjust managerial incentives following deregulation policies that enhance competition. We show that firms elicit higher managerial effort by offering stronger incentives as an optimal response to entry, as long as incumbent firms act as production leaders. Our model draws a link between an industry-specific feature, the time needed to build production capacity, and the effect that product market competition has on executive compensation. We offer novel testable implications regarding how this industry-specific feature shapes the incentive structure of executive pay.