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Motivation Model Calibration Estimation (in progress) Summary
Motivation Model Calibration Estimation (in progress) Summary
Executive Compensation and International Trade Diego Gruber - - PowerPoint PPT Presentation
Executive Compensation and International Trade Diego Gruber - - PowerPoint PPT Presentation
Motivation Model Calibration Estimation (in progress) Summary Executive Compensation and International Trade Diego Gruber Departament dEconomia i dHistria Econmica Universitat Autnoma de Barcelona 4th FIW Research Conference,
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Motivation Model Calibration Estimation (in progress) Summary
Rising Inequality
Well known observations, hot research topics:
- Rising income share of top earners (Piketty & Säez, 2004 [7]).
- Rising wage gap (Autor et al, 2006 [1]).
- Rising CEO income (Murphy, 1999 [5]).
Still no full agreement on their causes.
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Motivation Model Calibration Estimation (in progress) Summary
Rising shares of top earners
Top 10% Income Share
0.35 0.40 0.45 1960 1970 1980 1990 2000
Share of total income
0.8 1.0 1.2 1.4 1.6 1.8 1960 1970 1980 1990 2000
Top 1% Top 10−1%
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Motivation Model Calibration Estimation (in progress) Summary
Rising CEO income levels and dispersion
CEO Pay
0.0e+00 2.0e+07 4.0e+07 6.0e+07 8.0e+07 1.0e+08 1975 1980 1985 1990 1995 2000
Rank 10 Rank 50 Rank 100 Top 100 Avg
Figure: CEO pay includes salary, bonus, options. Source: Forbes via Piketty-Säez.
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Motivation Model Calibration Estimation (in progress) Summary
Trade, FDI, and Inequality
A number of authors find that trade and FDI by heterogeneous potentially explain some of the previous observations:
- Manasse & Turrini, JIE 2001 [3]
- Monte, JIE 2010 [4]
- Pica, JIE forthcoming [6]
Their claim: globalization induces superstar effects1, shifts newly created income disporportionately towards top-earners.
1See Rosen, 1981[8].
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Motivation Model Calibration Estimation (in progress) Summary
This Paper
Evaluates these claims quantitatively. Paper outline:
- 1. Presents the basic model of trade with heterogeneous firms
and income inequality.
- 2. Calibrates the model to obtain quantitative predictions.
- 3. Estimaties a simple model of executive compensation and
trade using firm- and industry-level data. Preliminary finding: superstar effects induced by trade appear to match well increases in executive compensation in manufacturing, but these are small with respect to the overall increase in inequality.
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Motivation Model Calibration Estimation (in progress) Summary
Outline
Motivation Model Calibration Estimation (in progress)
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Motivation Model Calibration Estimation (in progress) Summary
Basic Framework
Framework best described as “Melitz with occupational choice”:
- Individuals endowed with “management talent” ϕ ∼ G(ϕ)
choose to become either workers or managers.
- Managers get to keep profits, must pay fixed costs Fx to
- export. Workers earn salary w.
- Firm with manager of talent ϕ has linear technology in labor.
Production unit cost is τiw/ϕ, with i ∈ {h,x}.
- Firms produce differentiated varieties, compete
monopolistically.
- Consumers love variety, have Dixit-Stiglitz preferences.
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Motivation Model Calibration Estimation (in progress) Summary
Occupational Choice
- Individuals choose to become managers whenever πh(ϕ) ≥ w.
- Managers choose to become exporters whenever πx(ϕ) ≥ 0.
- Cutoffs ¯
ϕh and ¯ ϕx satisfy the conditions above with equality, hence
- Individuals with ϕ > ¯
ϕh become managers, individuals with ϕ > ¯ ϕx become exporters.
- As opposed to standard Melitz framework, this generates
income heterogeneity among individuals.
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Motivation Model Calibration Estimation (in progress) Summary
Income Distribution
ϕ ¯ ϕd ¯ ϕx
1
m(ϕ) πd πd +πx m(ϕ) pdf
m(¯ ϕx) 1
Figure: Income function m(ϕ) (left) and its distribution (right).
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Motivation Model Calibration Estimation (in progress) Summary
Effects of Globalization
When nations open up to trade (i.e. τ falls) a number of things happen in this world:
- More competition from imports, but more opportunities to
export.
- Domestic income shifts: less profits for all managers.
- Export income shifts: more profits for all exporters.
- Occupational shifts: less managers, more exporters.
- Result: If fixed costs of exporting are high enough, there
exists ˜ ϕ, such that for all ϕ > ˜ ϕ, gains in export profits dominate losses in domestic profits, and net gains are an increasing function of ϕ.
- Hence: higher inequality!
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Motivation Model Calibration Estimation (in progress) Summary
Effects of Globalization (cont.)
ϕσ−1 −∆πh ∆πx ∆πx ¯ ϕh ¯ ϕx ˆ ϕ ¯ ϕ′
h
¯ ϕ′
x
Figure: Effects on income of a decrease in τ.
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Motivation Model Calibration Estimation (in progress) Summary
Effects of Globalization (cont.)
m(¯ ϕ′
x)
m(¯ ϕx) 1
Income pdf with τ Income pdf with τ’
m(¯ ϕx) Figure: Income distribution (pdf) changes after a decrease in τ.
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Motivation Model Calibration Estimation (in progress) Summary
Outline
Motivation Model Calibration Estimation (in progress)
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Motivation Model Calibration Estimation (in progress) Summary
Calibration Exercise
- 1. Calibrate one-sector, symmetric, two-country model
parameters to match 1992 US data.
- 2. Recalibrate τ to match series of exports/GDP for 1970-2005.
- 3. Repeat exercise for asymmetric version and multisector version
using 2-digit industry manufacturing data.
- 4. Check for robustness of results to parameter modifications.
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Motivation Model Calibration Estimation (in progress) Summary
Simulation
1970 1975 1980 1985 1990 1995 2000 2005 10 20 30 40 50 60 70
R10 R50 R100 Avg
1970 1975 1980 1985 1990 1995 2000 2005 −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4
R10 R50 R100 Avg
Figure: Top CEO income levels (left) and absolute changes (right) (simulated).
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Motivation Model Calibration Estimation (in progress) Summary
Outline
Motivation Model Calibration Estimation (in progress)
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Motivation Model Calibration Estimation (in progress) Summary
Manager Income in the Model
Take w as numeraire, manager income of an exporting firm in sector s is πs(ϕ) = Dhs(ϕ)
- phs(ϕ)−ϕ−1
+Dxs(ϕ)
- pxs(ϕ)−τsϕ−1
−Fxs. In equilibrium phs(ϕ) = σ σ −1ϕ−1 Dhs(ϕ) = Es phs(ϕ)σP1−σ
s
pxs(ϕ) = τsphs(ϕ) Dxs(ϕ) = τ−σ
s
Dhs(ϕ). Set this in the expression above to obtain πs(ϕ) = 1 σ
- σ
σ −1 1−σ 1+τ1−σ
s
- Es
P1−σ
s
ϕσ−1 −Fxs. (1)
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Motivation Model Calibration Estimation (in progress) Summary
Estimation Strategy
- Assumption 1: fixed cost to export small relative to operating
profits.
- Assumption 2: Model parameters constant except τs and ϕ.
- Take logs in (1). Difference over two points in time, then:
∆logπs = ∆log
- 1+τ1−σ
s
- +∆log
Es P1−σ
s
+(σ −1)∆logϕ.
- First term captures changes in barriers to trade in sector s.
- Second term captures real production growth in sector s.
- Third term captures firm level productivity gains.
- Challenge: find good proxies (esp. 1 and 3).
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Motivation Model Calibration Estimation (in progress) Summary
Data
Effect Variable Data2 Source ∆logπs Income CEO compensation Execucomp ∆log
- 1+τ1−σ
s
- Trade
Industrial
- penness
[(X +M)/Y ] NBER-CES Industry Database ∆log
- Es
P1−σ
s
- Output
Industrial
- utput
NBER-CES Industry Database ∆logϕ Prod Residual of Sales ∼ Trade +Output Execucomp ??? FDI Industrial FDI volume UN
2Observations are differences between log averages of the periods 1992-94
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Motivation Model Calibration Estimation (in progress) Summary
Preliminary Results
Income Salary Salary+Bonus TDC1 DF 406 406 315 ¯ R2 0.25 0.16 0.18 Trade −0.05
∗
0.01 0.16
∗
Output −0.23
∗∗∗
−0.29
∗∗∗
−0.19
∗
Prod 0.20
∗∗∗
0.24
∗∗∗
0.36
∗∗∗
- Signif. codes: ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘#’ 0.1
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Motivation Model Calibration Estimation (in progress) Summary
Summary
- This paper evaluates the quantitative importance of superstar
effects induced by trade in explaining the phenomena of rising inequality among top earners and rising executive compensation.
- It develops a simple model of trade with heterogeneous agents
and occupational choice that generates superstar effects when trade barriers fall.
- It proceeds to try to determine the size of these effects using
two strategies: calibration and estimation using firm level data.
- Preliminary results suggest that broadly defined executive pay
increases more rapidly in sectors that become more open to trade.
- They also give support to claims (e.g. [2]) that trade alters
the composition of executive compensation.
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References
References D.H. Autor, L.F. Katz, and M.S. Kearney. The polarization of the us labor market. The American Economic Review, 96(2):189–194, 2006.
- V. Cuñat and M. Guadalupe.
Globalization and the provision of incentives inside the firm: The effect of foreign competition. Journal of Labor Economics, 2009. Paolo Manasse and Alessandro Turrini. Trade, wages, and ‘superstars’. Journal of International Economics, 54(1):97 – 117, 2001.
- F. Monte.
Skill bias, trade, and wage dispersion. 2009. K.J. Murphy. Executive compensation.
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References
In Handbook of Labor Economics, volume 3, pages 2485–2563. Elsevier, 1999.
- G. Pica and J.V.R. Mora.