Essays on Trade Costs, Supply Chain Uncertainty and CEO Compensation

This dissertation consists of two chapters that examine high managerial pay and supply chain uncertainty.

Chapter 1 constructs a game-theoretic model in which high CEO pay emerges as the outcome of an arms race, with each firm paying its CEO highly to protect its competitive position against rivals who also pay highly. For an arms race to emerge, highly-paid CEOs must generate idiosyncratic, privately-known internal effects on profit, and CEO pay disparities must also generate asymmetric profit differences from external effects beyond the simple differences in pay. If the distribution of internal effects satisfies a key uniformity condition, an arms race emerges as the only equilibrium of the game.

Chapter 2 examines the impact of supply chain uncertainty and ordering costs on trade. Importers hold safety stock to hedge against delays in delivery. An increase in supply chain uncertainty raises safety stocks, increases inventory costs, and reduces imports from locations with high delivery time uncertainty. An increase in order costs reduces a firm's shipping frequency and increases average inventory holding cost for the firm's base inventory stock. As a result, firms import less from locations with high ordering costs to reduce average inventory holding costs. Detailed data on actual and expected arrival times of vessels at U.S. ports serve to measure supply chain uncertainty consistent with the theory. Combined with detailed data on U.S. imports, freight charges and unit values, a 10 percent increase in supply-chain uncertainty lowers imports by as much as 3.7 percent. This is evidence that delivery uncertainty imposes a cost on imports according to the management of safety stocks. A one percent increase in ordering costs lowers imports by as much as 1.2 percent. Ordering costs impact the intensive margin of trade due to the management of base inventory stocks.