We propose a model in which firms use corporate governance as part of an optimal compensation scheme: better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms compete to attract better...

This paper builds on Rosen (1981) and Hvide (2002) to provide a simple framework that elucidates the nature of incentives in the tournaments among top executives in both the external managerial labor market for the top executive positions in other companies and within the executives' own firm...