← Search

Relative Performance Evaluation and Strategic Competition

Li He¹; Toni M. Whited²; Ran Guo³

¹ Indiana University · ² University of Michigan and NBER · ³ Shanghai Advanced Institute of Finance , Shanghai Jiao Tong University,

We examine how relative performance evaluation (RPE) affects industry competition—a question relevant for corporate boards interested in incentivizing executives. Using U.S. airline data, we estimate a dynamic game of competition between heterogeneous firms in an oligopolistic market, with managers incentivized by RPE contracts. While RPE can induce a firm to compete more intensely by smoothing compensation, it also amplifies a firm’s cost efficiency relative to its peers and can weaken competition from inefficient firms. The first effect dominates in small markets and the second in median-sized markets. RPE has little effect in large, highly profitable markets.

DOI

10.1093/rfs/hhaf028

Language

en

Export

BibTeX

Sources

crossref openalex