discretion

Abstract

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.

Year of Publication
1998
Number
406
Date Published
10/1998
Publication Language
eng
Citation Key
The RAND Journal of Economics, Vol. 30, No. 3, (Autumn, 1999
Bertrand, M., & Mullainathan, S. (1998). Is There Discretion in Wage Setting? A Test Using Takeover Legislation. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01c821gj78n (Original work published October 1998)
Working Papers