This paper studies the gender compensation gap among high-level executives in US corpora-
tions. We use the ExecuComp data set that contains information on total compensation for the
top ﬁve highest paid executives of a large group of US ﬁrms over the period 1992-1997. About
2.5% of the executives in the sample are women. These women earn about 45% less than their
male counterparts. As much as 75% of this gap can be accounted for by the fact that women
manage smaller companies and are less likely to be CEO; Chair, or President of their company.
The unexplained gender gap can be reduced to less than 5% when one further accounts for the
fact that female executives are younger and have less seniority than male executives. Over the
period under study, women have nearly tripled their participation in the top executive ranks and
have also strongly improved their relative compensation, mostly by gaining representation into
the larger corporations. While the absence of a signiﬁcant conditional gender gap implies that
women and men who hold similar jobs in ﬁrms of similar size receive fairly equal treatment in
terms of compensation, it does not rule out the possibility of discrimination in terms of gender
segregation or promotion.
This paper studies the gender compensation gap among high-level executives in US corpora-
Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory:
shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership
stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to
maximize ﬁrm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the
An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their
own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves
what they can. The only constraints they face may be the availability of funds or more general fears, such
as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view
as the skimming view. In this paper, we investigate the relevance of these two views.
We investigate the impact of changes in states’ anti-takeover legislation on executive compensation.
We ﬁnd that both pay for performance sensitivities and mean pay increase for the ﬁrms affected by
the legislation (relative to a control group). These ﬁndings are partially consistent with an optimal
contracting model of CEO pay as well as with a skimming model in which reduced takeover fears
allow CEOs to skim more. We compute lower bounds on the relative risk aversion coefficients
implied by our ﬁndings. These lower bounds are relatively high, indicating that the increase in
mean pay may have been more than needed to maintain CEOs’ individual rationality constraints.
Under both models however, our evidence shows that the increased pay for performance offsets
some of the incentive reduction caused by lower takeover threats.
We empirically examine two competing views of CEO pay. In the contracting view, pay is
used to solve an agency problem: the compensation committee optimally chooses pay contracts
which give the CEO incentives to maximize shareholder wealth. In the skimming view, pay
is the result of an agency problem: CEOs have managed to capture the pay process so that
they set their own pay, constrained somewhat by the availability of cash or by a fear of drawing
shareholders’ attention. To distinguish these views, we ﬁrst examine how CEO pay responds
to luck, observable shocks to performance beyond the CEO’s control. Using several measures
of luck, such as changes in oil price for the oil industry, we ﬁnd substantial pay for luck. Pay
responds about as much to a “lucky” dollar as to a general dollar. Most importantly, we ﬁnd that
better governed ﬁrms pay their CEOs less for luck. Our second test examines how much CEOs
are charged for the options they are granted. Since options never appear on balance sheets, they
might offer an appealing way to skim. Here again we ﬁnd a crucial role for governance: CEOs
in better governed ﬁrms are charged more for the options they are given. These results suggest
that both views of CEO pay matter. In poorly governed ﬁrms, the skimming view ﬁts better
(pay for luck and little charge for options) while in well governed ﬁrms, the contracting view
ﬁts better (ﬁltering out of luck and charging for options).
There is a popular perception that increased competitive pressures in U.S. product markets are
turning the employment relationship from one governed by implicit agreements into one governed
by the market. In this paper, I examine whether changes in import competition indeed affect the
use of implicit agreements between employers and workers in a key aspect of their relationship,
wage setting. I focus on the extent to which employers, after negotiating workers’ wages upon hire,
subsequently shield those wages from external labor market conditions. If increased competition induces a switch from these implicit agreements to spot market wage setting, then: (1) the sensitivity of workers’ wages to the current unemployment rate should increase as competition increases; and (2) the sensitivity of workers’ wages to the unemployment rate prevailing upon hire should decrease as competition increases. I ﬁnd evidence supporting both of these predictions, using exchange rate
movements to generate exogenous variation in import competition. I then show more directly
that increased ﬁnancial pressure on employers is one mechanism behind these effects - both of the
wage-unemployment sensitivity changes are larger in high leverage industries than in low leverage
ones. Moreover, declines in corporate returns following increased competition directly increase the
sensitivity of wages to the current unemployment rate. There are two general interpretations of
my set of results. Wage ﬂexibility may be a response to competition either because such ﬂexibility
reduces the probability of costly ﬁnancial distress or because lower corporate proﬁts weaken the
enforceability of implicit wage setting agreements.
Tightly knit extended families, in which people often give money to and get money from
relatives, characterize many developing countries. These intra-family flows may mean that
public policies may affect a very different group of people than the one they targeted. To assess
the empirical importance of these effects, we study a cash pension program in South Africa that
targeted the elderly. We use the variation in pension receipt in three-generation households that
comes from differences in the age of the elder(s) in the households. We ﬁnd sharp drops in the
labor force participation of prime-age men in these households when the elder women reach 60
or elder men reach 65, the respective ages for pension eligibility. We also ﬁnd that the drop in
labor supply diminishes with family size, as the pension money is split over more people, and
with educational attainment, as the pension money becomes less signiﬁcant relative to outside
earnings. Other ﬁndings suggest that power within the family might play an important role:
(1) labor supply drops less when the pension is received by a man rather than by a woman; (2)
middle aged men (those more likely to have control in the family) reduce labor supply more than
younger men in the family; and (3) female labor supply is unaffected. These last two ﬁndings
also respectively suggest that the results are unlikely to be driven by increased human capital
investment or by a need to stay home to care for the elderly. As a whole, the program seems to
have had large effects on a group—prime age men living with the old—quite different from the
ones it targeted—elderly men and women.
This paper empirically examines the role of social networks in welfare participation. Social theorists from across the political spectrum have argued that network effects have given rise to a culture of poverty. Empirical work, however, has found it difficult to distinguish the effect of networks from unobservable characteristics of individuals and areas. We use data on language spoken to better infer an individual’s network within an area. Individuals who are surrounded by others speaking their language have a larger pool of available contacts. Moreover, the network inﬂuence of this pool will depend on their welfare knowledge. We, therefore, focus on the differential effect of increased contact availability: does being surrounded by others who speak the same language increase welfare
use more for individuals from high welfare using language groups? The results strongly conﬁrm the
importance of networks in welfare participation.
We deal with omitted variable bias in several ways. First, our methodology allows us to include
local area and language group ﬁxed effects and to control for the direct effect of contact availability; these controls eliminate many of the problems in previous studies. Second, we instrument for contact availability in the neighborhood with the number of one’s language group in the entire metropolitan area. Finally, we investigate the effect of removing education controls. Both instrumentation and removal of education controls have little impact on the estimates.
Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels.
Testing this popular perception has proven difficult, however, because independent variation in the
extent of managerial discretion is needed. In this paper, we use states’ passage of anti-takeover
legislation as a source of such independent variation. Passed in the 1980s, these laws seriously
limited takeovers of ﬁrms incorporated in legislating states. Since many view hostile takeovers as
an important disciplining device, these laws potentially raised managerial discretion in affected
ﬁrms. If uncontrolled managers pay higher wages, we expect wages to rise following these laws.
Using ﬁrm-level data, we ﬁnd that relative to a control group, annual wages for ﬁrms incorporated
in states passing laws did indeed rise by 1 to 2% or about $500 per year. The ﬁndings are robust to a
battery of speciﬁcation checks and do not appear to be contaminated by the political economy of the
laws or other sources of bias. Our results suggest that discretion signiﬁcantly affects wages. They
challenge standard theories of wage determination which ignore the role of managerial preferences.