The growing gap between the pay of executives and employees has been the subject of much media publicity and political attention in recent times. We analyze the pay gap between executives and employees, focusing on three components: executive pay premium relative to industry peers; employee pay premium; and average pay gap at the industry level. We examine how the executive and employee pay premium components of the pay gap drive firm performance. On one hand, economic theories of matching and managerial talent suggest talented executives who generate relatively better firm performance receive wage premiums, implying a positive relation between pay gap and performance. On the other hand, sociological theories suggest that the inequity implied by a larger pay gap lowers firm performance by adversely affecting employee morale and productivity. To test these alternative theories, we utilize pay gap data from China that provides a setting with strong national preferences towards social equity but also with a scarcity of experienced managers and abundance of low-cost labour. Our results strongly support the economic theories-firm performance is largely driven by pay premium for executive talent. Additional tests using a smaller sample of US firms with pay gap data are consistent with our primary findings. Our study is likely to be of interest to politicians, regulators, and company executives responsible for understanding and evaluating pay gap and executive pay.

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Antitrust regulators play a critical role in protecting market competition. We examine whether the political process affects antitrust reviews of merger transactions. We find that acquirers and targets located in the political districts of powerful U.S. congressional members who serve on committees with antitrust regulatory oversight receive relatively favorable antitrust review outcomes. To establish causality, we use plausibly exogenous shocks to firmpolitician links and a falsification test. Additional findings suggest congressional members' incentives to influence antitrust reviews are affected by three channels: special interests, voter and constituent interests, and ideology. In