Working Paper: NBER ID: w29918
Authors: Renjie Bao; Jan De Loecker; Jan Eeckhout
Abstract: To answer the question whether managers are paid for market power, we propose a theory of executive compensation in an economy where firms have market power, and the market for man- agers is competitive. We identify two distinct channels that contribute to manager pay in the model: market power and firm size. Both increase the profitability of the firm, which makes managers more valuable as it increases their marginal product. Using data on executive compensation from Com- pustat, we quantitatively analyze how market power affects Manager Pay and how it changes over time. We attribute on average 45.8% of Manager Pay to market power, from 38.0% in 1994 to 48.8% in 2019. Over this period, market power accounts for 57.8% of growth. We also find there is a lot of heterogeneity within the distribution of managers. For the top managers, 80.3% of their pay in 2019 is due to market power. Top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.
Keywords: executive compensation; market power; firm size; income inequality
JEL Codes: E2; J2; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Power (L11) | Manager Pay (M12) |
| Firm Size (L25) | Manager Pay (M12) |
| Market Power (L11) | Firm Profitability (L21) |
| Firm Size (L25) | Firm Profitability (L21) |
| Firm Profitability (L21) | Marginal Product of Managers (D24) |
| Market Power (L11) | Growth in Manager Pay (M12) |
| Larger Firms (L25) | Higher Manager Pay (M52) |
| Top Managers (M12) | Manager Pay (M12) |
| Market Power (L11) | Hiring of Top Managers (M51) |