Relative Performance Evaluation and Strategic Competition

63 Pages Posted: 26 Nov 2018 Last revised: 8 Nov 2021

See all articles by Li He

Li He

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Erasmus Research Institute of Management (ERIM)

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

Ran Guo

China-ASEAN Institution of Financial Cooperation

Date Written: November 4, 2021

Abstract

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 with heterogenous firms in an oligopolistic market with RPE contracts. RPE naturally makes CEO compensation less sensitive to market demand. However, because RPE amplifies a firm's cost efficiency relative to its peers, RPE does not always induce aggressive product market competition, often weakening competition from inefficient firms. While RPE induces endogenous selection of efficient firms into large, high entry-cost markets, and vice versa, RPE has little effect in uncompetitive markets.

Keywords: relative performance evaluation, entry and exit, competition

JEL Classification: G32, G34, L41, L10

Suggested Citation

He, Li and Whited, Toni M. and Guo, Ran, Relative Performance Evaluation and Strategic Competition (November 4, 2021). Available at SSRN: https://ssrn.com/abstract=3287143 or http://dx.doi.org/10.2139/ssrn.3287143

Li He

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
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3000 DR Rotterdam, 3000 DR
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HOME PAGE: http://https://www.rsm.nl/people/li-he/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Toni M. Whited (Contact Author)

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ran Guo

China-ASEAN Institution of Financial Cooperation ( email )

East Daxue Road #100
Nanning, Guangxi 530004
China

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