This paper examines the importance of managerial incentives as a source of productivity gains from trade. I introduce a principal-agent problem in a trade model with monopolistic competition and firm level heterogeneity, in which firms provide incentives to their managers to increase effort on productivity-enhancing activities. The model predicts that the effect of trade liberalization on managerial incentives is heterogeneous across firms, and depends on how a firm’s expected revenue responds to the degree of trade exposure. Using data on U.S. manufacturing firms I find that trade liberalization induces stronger managerial incentives for firms in the middle-to-upper range of the firm-productivity distribution and weaker incentives for firms in the low range of the distribution, as predicted by the model. Empirical estimates indicate that between 5% and 8% of the aggregate productivity growth for the 1993-1998 period of trade liberalization can be attributed to within-firm productivity growth through managerial incentives