Abstract
We develop a market equilibrium model to show how search frictions in the CEO market, agency conflicts and product market characteristics interact to affect CEO market tightness, firm size and CEO incentive pay. The theory generates novel implications that link firms' product markets with CEO markets. Different determinants of competition—the entry cost, product substitutability, and market size—have contrasting effects on CEO market tightness, CEO pay and firm size. We also derive new predictions for the impact of product market risk on firm size and CEO incentive compensation. We show empirical support for several cross-sectional hypotheses derived from the theory for how CEO pay, CEO incentives, firm size and market tightness vary with product market characteristics.
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