Globalization and Executive Compensation

William Olney and Wolfgang Keller attribute the rise in income inequality to globalization — and poor governance.

We have three approaches to assess the extent to which this result is driven by rent-capture activities. First, we investigate whether executive bonuses, which are relatively discretionary and thus conducive to rent-capture, are more sensitive to export shocks. Second, we ask whether the impact of exogenous export shocks on executive bonuses is stronger at poor-governance firms where rent-capture is common. Finally, we examine whether executives with more managerial power (i.e. CEOs) are the ones that disproportionately benefit from exports shocks at poor-governance firms.

As illustrated in Figure 3, we find evidence in support of all three of these predictions. Export shocks disproportionately affect the bonuses of powerful executives at poor-governance firms, all of which suggests that rent-capture is playing an important role in the relationship between globalization and executive compensation.

Overall, these findings indicate that globalization has played a more central role in the rapid growth of executive compensation and U.S. inequality than previously thought. Furthermore, non-market returns and in particular rent-capture is contributing to this observed relationship. However, these findings should not be interpreted as a rationale for protectionist policies, since globalization has also generated large increases in the standard of living. The key question for policy makers is to devise ways to address the distributional implications of globalization, such as those identified in this paper, without compromising aggregate welfare gains.The complete paper is available for download here.ReferencesAutor, David H., David Dorn, and Gordon H. Hanson. 2013. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103(6): 2121-68.Bertrand, Marianne and Sendhil Mullainathan. 2001. “Are CEOs Rewarded for Luck? The Ones without Principals Are.” The Quarterly Journal of Economics, 116(3): 901-932.Gabaix, Xavier, and Augustin Landier. 2008. “Why has CEO Pay Increased so Much?” The Quarterly Journal of Economics, 123(1): 49-100.Garicano, Luis and Esteban Rossi-Hansberg. 2006. “Organization and Inequality in a Knowledge Economy.” The Quarterly Journal of Economics, 121(4): 1383-1435.Keller, Wolfgang and William W. Olney. 2017. “Globalization and Executive Compensation,” NBER Working Paper # 23384.Pierce, Justin R. and Peter K. Schott. 2016. “The Surprisingly Swift Decline of US Manufacturing Employment.” American Economic Review, 106(7): 1632-62.Piketty, Thomas, and Emmanuel Saez. 2003. “Income Inequality in the United States, 1913-1998.” The Quarterly Journal of Economics, 118(1): 1-41.Piketty, Thomas, Emmanuel Saez, and Stefanie Stantcheva. 2014. “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities.” American Economic Journal: Economic Policy, 6(1): 230-271.Rosen, Sherwin. 1981. “The Economics of Superstars.” The American Economic Review, 71(5): 845-858.The World Top Incomes Database (WID). F Alvaredo, T Atkinson, T Piketty, E Saez, and G Zucman. Online at http://wid.worldEndnotes1“American policy has allowed the winners to keep most of the spoils of trade and has given the losers crumbs. This has exacerbated income inequality by raising the profits of big corporations and the salaries of executives and other white collar professionals while leaving blue-collar and lower-skilled workers poorer[.]” New York Times Editorial, April 2, 2016(go back)

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