the effect of competition on executive compensation and incentives: evidence from a quasi-natural experiment

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.