Foreign Competition and the Durability of US Firm Investments
(with Philippe Fromenteau and Jan Tscheke)
How does the exposure to product market competition affect the investment horizon of firms?
When tougher competition reduces future profitability, firms have an incentive to shift
investments towards more short-term assets. To study this mechanism empirically, we
formulate a stylized theoretical framework of firm investments and derive a within-firm
estimator that uses variation across investments with different durabilities. We exploit
the Chinese WTO accession as a competition shock for US firms to estimate the effects of
product market competition on the composition of firm investments using expenditures across
different assets within listed US manufacturing companies. We find that firms that
experienced tougher competition shifted their expenditures towards investments with a shorter
durability. We find this effect to be relatively larger for firms with lower total factor productivities.
We incorporate trade in tasks à la Grossman and Rossi-Hansberg (2008) into a
small open economy version of the theory of firm organization of Marin and
Verdier (2012) to examine how offshoring affects the way firms organize.
We show that the offshoring of production tasks leads firms to reorganize
with a more decentralized management, improving the competitiveness of the
offshoring firms. We show further that the offshoring of managerial tasks
relaxes the constraint on managers but toughens competition, and thus has
an ambiguous impact on the level of decentralized management and CEO wages
of the offshoring firms. In sufficiently open economies, however, managerial
offshoring unambiguously leads to more decentralized management and to larger
CEO wages. We test the predictions of the model based on original firm level
data we designed and collected of 660 Austrian and German multinational firms
with 2200 subsidiaries in Eastern Europe. We find that offshoring firms are
22.3% more decentralized than non-offshoring firms. We find further that the
average fraction of managers offshored reduces the level of decentralized
management by 3.4%, but increases the level of decentralized management by
6.8% in industries with a level of openness above the 25th percentile of the
openness distribution. Lastly, we find that one additional offshored manager
lowers CEO wages relative to workers by 4.9%.
Top Inequality, Firms and the Global Division of Labor: Evidence from the Executive Labor Market
Many industrialized economies have witnessed a rapid rise in top inequality and in the global sourcing of
production inputs. This paper investigates how global sourcing has affected employees at the top of corporate
hierarchies using unique linked manager-firm data that cover executives and senior managers across Europe and
North America. I document that managerial incomes became more dispersed across the firm size distribution since
2000 and then study the role of global sourcing in that development. By exploiting variation in international
transport margins and in the world supply of intermediates, I estimate the effects of global sourcing on
managerial incomes, within-firm pay income inequality, wealth inequality and financial incentives. I find that
global sourcing contributed substantially to rising top inequality, in particular due to an increasing dispersion
in the value of managers' equity wealth. This mechanism has increased wealth-performance sensitivities of
managers in relatively large firms due to an appreciation of the market capitalization within offshoring-intensive
industries. To rationalize my empirical findings, I introduce a tractable multiplicative model of optimal CEO
incentives into an open-economy model of heterogeneous firms where countries differ in their managerial capabilities
and globalization allows firms to hire labor inputs from abroad.
How does globalization affect the balance of power between managers and firm owners?
This paper studies the effect of economic integration on governance practices within firms.
I propose a theory of endogenous corporate governance investments in industry equilibrium
with monopolistic competition. Firms can use investments into better corporate governance
as a cheap substitute to performance compensation to mitigate agency problems. International
integration alters the demand for managers in the economy such that firms may reduce their
corporate governance investments and offer higher performance payments. This
globalization-induced deterioration of corporate governance in the economy diminishes the
welfare gains from globalization. Using data on governance practices in U.S. manufacturing
corporations, I provide empirical evidence that conforms to the model predictions. Firms in
industries that experienced substantial trade liberalization between 1990 and 2006 have changed
their governance practices allowing for more managerial slack and offered higher equity payments
to their CEOs. These effects are particularly large in relatively dynamic industries that are
characterized by large exit rates.