Crushing the Competition: the Product Market Effects of Relative Performance Evaluation

Abstract

Relative Performance Evaluation (RPE) is a common feature of executive compensation contracts that is used to incentivize managerial effort. A side effect of RPE that is lesser-known (yet trivial to prove theoretically) is to alter competitive conduct in oligopolistic industries, introducing a motive for managers to hurt competitors' profits rather than pursue the maximization of their own firm's profits. We build the first general equilibrium model with realistic managerial incentives and GHL demand in which firms compete in a network game of oligopoly. In our model, the pro-competitive effects of RPE increase with the assortativity between the network of rivalries and the network of RPE benchmarking relationships. To construct the latter, we undertake a massive data analysis effort to process highly-unstructured data from over 15,000 executive compensation contracts. We then use our model to quantify, firm-the-firm, the effect of RPE on the firm's supply decisions, allocative efficiency and consumer welfare.