Many industrialized economies have seen a rapid rise in top income inequality and
in the globalization of production since the 1980s. In this paper I propose an open
economy model of executive pay to study how offshoring affects the pay level and
incentives of top earners. The model introduces a simple principal-agent problem
into a heterogeneous firm talent assignment model and endogenizes pay levels and
the sensitivity of pay to performance in general equilibrium. Using unique data of
manager-firm matches including executives from stock market listed firms across
the U.S. and Europe, I quantify the model predictions empirically. Overall, I find
that between 2000 and 2014 offshoring has increased executive pay levels, raised
earnings inequality across executives and increased the sensitivity of pay to firm
performance
