“The Impact of Trade on Incentive Contracts and Returns to Talent” by Yanhui Wu
University of Southern California
This paper studies the impact of international trade on the allocation of managers to incentive contracts across firms and the returns to managerial talent. Embedding a limited-liability principal-agent model into a framework with imperfect competition, I show that the equilibrium sorts individuals, on the basis of talent, into production workers, residual-claiming managers, and salaried managers receiving performance pay with different power. Within-industry trade induces resource reallocation across firms and thus affects the value of talent and effort favoring the more-talented managers. The model predicts that international trade increases the share of rent-sharing contracts that are used to motivate the most-talented managers, resulting in a more dispersed wage distribution among managers and a larger wage gap between managers and workers.