Job assignment, market power and managerial incentives

•The paper establishes how market power and managerial talent influence managerial incentives.•If firms with higher market power benefit more from managerial actions, then more talented managers are lured into such firms.•The relationship between market power and incentives is monotone if and only if the matching is monotone.

I study how product market conditions determine labor market outcomes in an economy where a continuum of heterogeneous firms compete for heterogeneous managers. The main objective of the paper is to establish how market power and managerial talent influence the incentive contracts. If firms with higher (lower) market power benefit more from managerial actions, then managerial talent has greater effects in such firms, and hence more talented managers are lured into firms with higher (lower) market power following a positively (negatively) assortative matching pattern. The equilibrium relationship between market power and managerial incentives is monotone if and only if the equilibrium matching is monotone.