MACRO Seminar: Shihan Shen, Rice University

Speaker

Shihan Shen, Rice University

Title

"Crushing the Competition: the Pro-Competitive Effects of Relative Performance Evaluation"

Abstract

Relative Performance Evaluation (RPE) is a feature of executive compensation that evaluates a manager’s performance relative to peer firms. Economic theory predicts that, under sufficient risk sharing between managers and shareholders, firms that adopt RPE should engage in more aggressive product-market conduct (i.e. charge lower prices). However, the extent of RPE adoption and its market effects remain disputed: firm disclosures often reference RPE, yet managers’ pay shows little correlation with competitors’ performance despite its well-documented sensitivity to market-wide shocks. We study the adoption and product-market effects of RPE using a network oligopoly model (Pellegrino, 2025) with ultra-realistic managerial incentives, disciplined by granular data from over 350,000 executive compensation contracts. We find that RPE is widespread in form but limited in substance: pay remains tied mainly to absolute objectives, and relative performance is typically benchmarked against broad stock-market indices rather than close rivals. These adoption patterns substantially dampen RPE’s competitive impact, reconciling the seemingly contradictory evidence. Counterfactual simulations indicate that stronger, rival-based RPE could enhance competition and consumer welfare, but such effects remain modest under current practices.

Biography

I am an assistant professor of economics at Rice University.  My research interests are macroeconomics, firm dynamics and economic growth. My current researches focus on the impact of technological progress on productivity growth and inequality. 

CV: Curriculum Vitae  (Last updated: Aug 2025)