The Impact of Trade on Managerial Incentives and Productivity

Abstract

This paper examines the importance of trade-induced managerial incentives as a source of productivity gains. I introduce a principal-agent problem in a trade model with monopolistic competition and firm level heterogeneity, in which firms provide incentives to their managers to reduce costs. The model shows that trade liberalization, given by a reduction in trade costs, induces stronger managerial incentives among firms productive enough to export and weaker incentives for firms not productive enough to export. Among the exporters, the increase in incentives is higher for low-productive exporters than high-productive exporters. Examination of U.S. manufacturing firms yields evidence consistent with the model. I find that between 5% and 8% of the industry productivity growth during the 1993-1998 period can be attributed to productivity gains through managerial incentives.