Work

Relative Performance Evaluation and Strategic Competition

Year: 2025

Type: article

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 between heterogeneous firms in an oligopolistic market, with managers incentivized by RPE contracts. While RPE can induce a firm to compete more intensely by smoothing compensation, it also amplifies a firm’s cost efficiency relative to its peers and can weaken competition from inefficient firms. The first effect dominates in small markets and the second in median-sized markets. RPE has little effect in large, highly profitable markets.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhaf028

Authors: Li He, Toni M Whited, Ran Guo

Institutions: Indiana University, National Bureau of Economic Research, University of Michigan, Shanghai Jiao Tong University, Erasmus University Rotterdam

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

OpenAlex ID: W4413880568

FWCI: 5.401

Cites: 51

Cited by: 5

Related to: 10