Is there discretion in wage setting? : a test using takeover legislation

52 Pages·1998·1.4 MB·English

by  Mullainathan, Sendhil

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working paper
department
economics
of
Is There Discretion in Wage Setting?
A
Test Using Takeover Legislation
Sendhil Mullainathan
Marianne Bertrand
No. 98-19 October 1998
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139

WORKING PAPER
DEPARTMENT
OF ECONOMICS
Is There Discretion in Wage Setting?
A
Test Using Takeover Legislation
Sendhil Mullainathan
Marianne Bertrand
No. 98-19 October 1998
MASSACHUSETTS
OF
INSTITUTE
TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASS. 02142
imACHUSETTS INSTITUTE
OfTECHNOLOGY
DEC 4
1998
LIBRARIES
Is There Discretion in Wage Setting?
A
Test Using Takeover Legislation
Marianne Bertrand (Princeton University and NBER)
Sendhil Mullainathan (MIT and NBER)*
Abstract
Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive
levels. Testing this popular perception has proven difficult, however, because independent vari-
ation in the extent ofmanagerial discretion is needed. In this paper, we use states' passage of
anti-takeover legislation as a source ofsuch 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 distipnning device, these laws potentially raised managerial
discretion in affected firms. If uncontrolled managers pay higher wages, we expect wages to
risefollowingthese laws. Usingfirm-level data, we find that relativeto acontrol group, annual
wagesfor firms incorporatedinstates passinglaws did indeed riseby 1 to 2% or about $500 per
year. The findings are robust to a battery ofspecification checks and do not appear to be con-
taminatedbythepoliticaleconomyofthe lawsorothersourcesofbias. Ourresults suggestthat
discretion significantly affects wages. They challenge standard theories ofwage determination
which ignore the role ofmanagerial preferences. JEL J30, M12, G30)
(
*For extremely helpful comments,we are grateful to George Baker, Charlie Brown, Larry Katz, Caroline Minter-
Hoxby, David Scharfetein and Andrei Shleifer. We are especially indebted to Larry Katz for countless discussions.
Florencio Lopez-De-Silanes and John Pound provided essential help in understanding the state takeover laws. We
would also like to thank participants at the Harvard/MIT Behavioral Economics Workshop as well as at the La-
bor/Public Finance Lunch and Organization Lunch at Harvard. This paper was written while the authors were
graduate students at Harvard University, e-mail: [email protected] and [email protected].