Simon Burgess and Paul Metcalfe
This paper examines the influence that product market competition has on the use of incentive payment schemes. We use data from a large representative cross-section survey which allows us to control for other influences. We show that the degree of product market competition that an establishment faces has a significantly positive effect on the likelihood that it will use a performance-related pay system. This relates to earlier theoretical results of Holmstrom and Hart among others. Interestingly, this effect holds for non-managers as well as managers.
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