Working paper 00/028 - Abstract

Incentive Pay and Product Market Competition

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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