a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

optimal collusion with internal contracting abstract in this paper two firms play an infinitely repeated bertrand game and each firm has an agent who produces the firm s output and holds private information about production costs the colluding firms fix prices and allocate market shares based on their agents information we develop a model of collusion in which firms use the presence of agents as a strategic opportunity to restrict their incentives to distort private information we show that such firm behavior may expand the scope of optimal collusion whether market allocation schemes are asymmetric or symmetric

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

managerial bargaining power in the determination of compensation contracts and corporate investment this paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision the model relates the compensation scheme to outside share ownership and managerial bargaining position using the methods of mechanism design under asymmetric information a shift in favor of effort is documented in the case where managerial bargaining strength is weak while a shift toward more use of capital investment results from strong managerial bargaining power the model distinguishes managerial equity holdings from contingent compensation contracts our results are related to the empirical literature on pay performance sensitivities

employment bonuses and labor turnover the purpose of this paper is to illustrate how a two part compensation system composed of a rigid base salary and a flexible bonus can reduce turnover it is shown that bonus pay is an effective retention device if it is risk reducing and is correlated with outside contract offers for the first time to the best of our knowledge a model of bonus payments is tested with u s instead of japanese data the empirical results are suggestive of the conditions that give bonuses an important even dominant role in worker retention

does the form of compensation matter abstract the role of fee contracts in the agency relation between investment bankers and client firms in tender offers is investigated using a sample of offers between 1978 and 1986 different fees have different payoff functions which can be used by firms to create incentives and by bankers to signal differences in abilities the effectiveness of fee contracts in resolving agency problems in tested with mixed results the evidence suggests that fee contracts are used as a tool by both firms and bankers and that contracts influence tender offer outcomes but that contracting is only a partial solution to the agency problem

incentives learning and compensation a theoretical and empirical investigation of managerial labor contracts this article analyzes properties and implications of multiperiod managerial labor contracts under two alternative hypotheses incentives in which productivity depends on unobservable effort and learning in which ability is unknown and is revealed over time shared and conflicting implications of these competing models are developed in terms of experienceearnings profiles and the relation between compensation and performance i empirically examine these theoretical results by using a longitudinal sample of 1 488 chief executive officers followed from 1974 1985 the data yield mixed evidence that generally supports the learning hypothesis over the incentive hypothesis

public service innovation and multiple institutional logics the case of hybrid social enterprise providers of health and wellbeing public sector organisations are confronted with growing health and social care needs in combination with severe resource constraints prompting interest in innovative responses to such challenges public service innovation is poorly understood particularly where innovators must navigate between the norms practices and logics of public private and civil society sectors we contribute to the understanding of how innovating hybrid organisations are able to creatively combine co existing logics case study evidence from newly established social enterprise providers of health and wellbeing services in england is utilised to examine how innovations are shaped by i an incumbent state or public sector logic and two challenger logics relating to ii the market and increasing competition and iii civil society emphasising social value and democratic engagement with employees and service users the analysis shows how a more fluid and creative interplay of logics can be observed in relation to specific strategies and practices within organisations these strategies relate to the empowerment of staff to be creative financial management and knowledge sharing and protection the interplay of logics shaping social innovation is also found in relationships with key stakeholders notably public sector funders service users and service delivery partners implications are drawn for innovation in public services and hybrid organisations more broadly

the anatomy of corporate control directors shareholders and executive remuneration in giant us and uk corporations this paper provides a contemporary comparison of the anatomy of corporate contol in giant u s and u k corporations the comparison draws upon an analysis of share ownership executive remuneration board membership and the patterns of interlocking directorships the results are of significance not only for the managerialist hypothesis but also for the wider issues concerning the control and behavior of these giant corporations the evidence presented leads to some qualifications of the managerialist position furthermore the study identifies the potentially key role played by nonexecutiv e directors particularly where their board membership is associated with significant shareholdings of financial institutions copyright 1987 by oxford university press

market constraints as a rationale for the friedman savage utility function since the classic paper by friedman and savage 1948 it has generally been accepted that the observed fact that individuals or firms participate in unfair lotteries and other forms of unfair risk taking may be explained by a section in the individual s utility function in which the individual shows risk preference rather than risk aversion in their model friedman and savage specify a utility function which is in turn concave convex and concave thus allowing for simultaneous purchase of insurance risk aversion and participation in lotteries risk preference however while their specified utility function is indeed capable of explaining observed behavior it does seem to be rather unsatisfactory in that it is an ad hoc specification it is the purpose of this paper to suggest a set of circumstances which give rise to a friedmansavage type utility function in particular it is shown that when certain capital market imperfections exist the utility function defined over intermediate wealth should be distinguished from and may have different properties than the one defined on final wealth then even if we accept the common assumption made in the literature that individuals are risk averse that is that their utility function is concave over final wealth it is still possible that they participate in unfair gambling and of course may also purchase insurance

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

stock options and the strategic use of managerial incentives in cournot based oligopoly models there is an incentive for firms to pursue overly aggressive behavior resulting in prices and profits below those of the cournot equilibrium compensating managers in proportion to a combination of profits and sales provides one mechanism through which aggressive behavior emerges however when the profit component of managerial compensation comes in the form of stock options the aggressive behavior is restrained or even eliminated in equilibrium this result relies only on the nonlinearity of the stock option generalizations to other forms of compensation are discussed copyright 1993 by american economic association

optimal managerial contracts and equilibrium security prices recent developments in economic theory have focused attention on efficient methods for providing incentives within a corporation especially to top management jensen meckling 12 have examined some implications of incentive or agency problems for corporate finance in this paper we combine a simple model of security market equilibrium with that of an optimal managerial incentive contract using results of harris raviv 8 and holmstrom 9 we provide a rationale for including security prices in the managerial incentive contracts of publicly held firms in this model we also show that non systematic diversifiable risks will be considered in the capital budgeting decisions of a managerial firm operated in the interests of its stockholders this is in contrast to the implication of the arbitrage pricing theory a similar result follows from the capital asset pricing model which abstracts from incentive problems and suggests that only systematic risks ought to be considered the optimal contract model of the corporation takes the following view of the firm since decision makers within a firm are not sole owners of the business but employed agents the decisions which they make depend on the incentives which the organization provides these incentives are embodied explicitly in employment contracts and implicitly through the threat of dismissal or effect on reputation the contract whether explicit or not describes the decision maker s anticipation of the consequences to him conditional on various observable outcomes these outcomes are used to provide information useful in determining whether he did his job properly in the simplest optimal contract scenario there is a single principal and a single agent whose decision concerns the level of effort he expends the level of effort affects the level of output of the firm but not unambiguously because the output is also governed by other stochastic elements as a result some information about the agent s level of effort can be inferred

board structure and executive pay evidence from the uk we examine the impact of board structure on executive pay for 1 880 uk public firms over the period 1983 2002 using panel data analysis first the proportion of non executive directors tends to decrease the rate of increase in executive pay whereas board size tends to increase it second the proportion of non executives strengthens the relation between the rate of increase in executive pay and changes in performance in particular although for firms in general the pay performance link is much weaker when performance is poor a higher proportion of non executives strengthens this link considerably finally firms that increase the number of nonexecutives in order to comply with the cadbury code of 1992 experience both a decline in the rate of increase in executive pay and an increase in pay performance sensitivity

dynamic duopolistic competition with sticky prices the authors study duopolistic competition in a homogeneous good through time under the assumption that its current desirability is an exponentially weighted function of accumulated past consumption this implies that the current price of the good does not decline by as much to accommodate any given level of current consumption our an alysis is conducted in terms of a differential game it is found that the equilibrium price corresponding to the open loop nash equilibriu m strategies approaches the static cournot equilibrium price while th e equilibrium price corresponding to the closed loop nash equilibrium strategies which are subgame perfect approaches a price below it copyright 1987 by the econometric society

economic man as a moral individual first there is the broadly ethical question how should one live to emphasize this connection is not the same as asserting that people will always act in ways they will themselves morally defend but only to recognize that ethical deliberations cannot be totally inconsequential to actual human behavior sen 1988 3 4 i introduction it is a plausible proposition that some people s behavior is affected significantly by moral considerations a growing literature in economics and related disciplines reviewed and analyzed in earlier work by two of the authors goldfarb and griffith 1991a griffith and goldfarb 1991b explores the possibility and desirability of incorporating these moral considerations into the economic analysis of individual behavior 1 a variety of approaches to introducing moral considerations into economic analysis have been put forward by contributors within economics including sen 1974 1977 1988 hirschman 1985 phelps 1975 vanberg 1988 brunner 1987 frank 1987 1988 hirshleifer 1985 mueller 1986 and schotter 1981 among others among related disciplines the philosophers gauthier 1986 and ulman margalit 1977 the sociologists coleman 1987 and etzioni 1986 1988 and the political scientist axelrod 1984 all present relevant analyses as our earlier review indicated these authors pursue three competing approaches introducing moral values as part of preference functions introducing moral norms or rules as constraints and introducing such norms as decision rules for coping with strategic interaction gaming situations we propose here a concrete method for including moral values in the economist s model of preferences our method maintains the standard economic framework of an agent maximizing his or her utility subject to constraints but modifies the utility function so that the enjoyment or utility from consuming a given set of goods varies in a lumpy or discontinuous way depending on the concurrent moral content of the individual s behavior moreover it offers an analytical representation of the linkage between preferring to act morally and the individual s being faced with possibly significant differences in constraints because of such moral considerations 2 the paper proceeds as follows section ii indicates where our approach fits in the existing literature incorporating moral values into preference functions section iii sets forth our approach to specifying these utility functions section iv suggests some extensions section v presents further discussion and conclusions ii relation to the literature while not directly inspired by the occupational choice literature our approach can be usefully viewed as an application of the economic model of occupational choice to modelling moral preferences 3 this approach helps fill an analytical gap between hochman and rodgers 1969 small modification of the standard microeconomic framework and the more extensive departures suggested by etzioni 1986 and sen 1974 1977 our model helps fill this gap by providing what we think is an intuitively appealing treatment of the discontinuous or lumpy content of important classes of moral decisions hochman and rodgers 1969 present an analysis of the possible relationship between moral and other values in the context of charitable transfers their analysis is now a standard ingredient in intermediate microeconomics textbooks 4 their interdependent utility approach puts impoverished individual y s income or utility into individual x s utility function one then analyzes the conditions under which individual x will either himself transfer resources to individual y or vote for a government program to make such a transfer this approach allows transfers that vary continuously from zero to very large amounts of money with decisions involving trade offs at the margin for our purposes this marginal trade off feature so useful for analyzing charitable transfers presents a very significant limitation when attempting to apply the model to a wider range of moral behavior

managerial reputation and divisional sell offs a model and empirical test abstract this paper presents a reputation model of divestiture activity that yields a sharp cross sectional implication for event studies of sell off announcements a decision to divest a division that is known to be successful conveys good news about the division in contrast a decision to divest a division that is known for underperformance conveys no news about the division we test these hypotheses on a sample of sell off announcements for which we find stories in the wall street journal unambiguously characterizing the division being sold as either a winner or a loser the stock price reaction to the sell off of losers is indistinguishable from zero while the stock price reaction to the sell off of winners is a statistically significant 2 5 these results are strengthened when we expand the sample to include divisions whose profitability was announced in the company s annual report for this expanded sample the average stock price reaction to the announcements of sell offs of losers remains indistinguishable from zero while returns from the sell offs of winners average a highly significant 3 4

assessing the relative performance of u k university technology transfer offices parametric and non parametric evidence abstract we present evidence on the relative performance of u k university technology transfer offices ttos using data envelopment analysis dea and stochastic frontier estimation sfe u k ttos are found to exhibit low levels of absolute efficiency there also appear to be decreasing returns to scale implying that ttos may need to be reconfigured into smaller units the development of regionally based sector focused ttos is also advised consistent with qualitative evidence from u s ttos we find that there is a need to upgrade the business skills and capabilities of u k tto managers and licensing officers

how do business model and health technology design influence each other insights from a longitudinal case study of three academic spin offs abstract academic spin offs often lack business expertise face uncertainties regarding their innovation and their markets and do not have a clear idea of how their product will create value in spite of this vagueness academic entrepreneurs must articulate a business model and rapidly establish trustworthy relationships with potential users purchasers and capital investors one may thus wonder how their technology development process is influenced by the long term expectations of their putative customers as well as the short term requirements of capital investors this longitudinal case study examines how the business models of three canadian health technology spin offs sought to address the value expectations of clinical users and capital investors how tensions were resolved and the impact this had on technology design we describe the synergistic readjustments drastic reconfiguration and mismatch between business model and technology design we observed our discussion highlights the mediating mechanisms by which business models and technology design influence each other clarifying why the initial value proposition of the spin offs was either refined or reframed beyond confirming the importance of differentiating business models in the health technology industry our study suggests that it is not only who makes decision that matters but also how stakeholders value expectations get embedded in a spin off s value proposition

stock related compensation and product market competition this dissertation consists of four self contained essays primarily concerned with incorporating the objectives of real world top managers as revealed by the available empirical evidence in supergame theoretic analyses of long term competition between oligopolistic firms the first essay ownership control and collusion considers how the separation between ownership and control affects firms competitive attitudes when top managers have the preference for smooth profit streams revealed by the evidence on income smoothing and when managerial compensation has the low pay performance sensitivity found in many empirical studies in a similar fashion the second essay stock related compensation and product market competition deals with the effects of the apparently more aggressive managerial incentives linked to stock price e g stock options which have become increasingly common in the u s on long term oligopolistic competition in the third paper debt as a credible collusive device shareholders commitments to reduce conflicts with debtholders by choosing a top manager with a highly valuable reputation or with conservative incentives are considered these forms of commitment have been shown to reduce the agency cost of debt finance this paper characterizes their effects on the relation between firms capital structure and product market competition the fourth paper multimarket contact concavity and collusion addresses the relation between multimarket contact and firms ability to sustain collusive behavior in repeated oligopolies it explores how this relation is affected by the strict concavity of firms objective function induced by managerial objectives and by other features of reality discusses the effects of conglomeration and horizontal mergers and extends the results to non oligopolistic supergames

market valuation of employee stock options this study investigates whether investors incorporate the value of a firm s outstanding employee stock options into its stock price i estimate the outstanding options value for a sample of firms for which outstanding fixed options exceed 5 of outstanding common shares in 1988 i find a negative correlation between the value of outstanding options and a firm s share price the correlation is stronger i for the option s intrinsic value than for the option s time value ii for options that are later in their vesting stage than earlier in their vesting stage and iii for large firms than for small firms in addition the fasb s method for calculating compensation expense has no explanatory power in the presence of this paper s calculation of the options value

organizing the entrepreneurial hospital hybridizing the logics of healthcare and innovation contemporary research hospitals occupy a vexed position in the policy landscape on the one hand as healthcare providers they must abide by the logic of healthcare policy which expects health research to support improved health outcomes and high quality healthcare systems on the other hand as research facilities they are beholden to the logic of innovation policy which seeks to advance research driven science and technology derived innovations where industry is the key customer and client at the intersection of these policy logics the research hospital must orchestrate a range of interests that may not always coexist harmoniously through a detailed case study of a canadian research hospital we illustrate organizational efforts to hybridize healthcare and innovation logics the need to be more business like and the expected financial and reputational rewards encourage acceptance of a mandate for technology transfer and commercialization as well there is hope that the entrepreneurial turn can serve the hospital s own mission by prioritizing the needs of patients and the organization itself as a user of its own innovations further insofar as successful technology transfer and commercialization is a transformative force it is expected to enable the research hospital to achieve its goal of translational and impactful health research as we illustrate there is much optimism that these hybridizing efforts will produce a successful cross yet the trajectory of change in the context of mixed logics is necessarily uncertain and other hybrid futures cannot be foreclosed more sterile or monstrous outcomes remain possible with potentially significant implications for the intellectual economic and health benefits that will arise as a result

executive compensation and principal agent theory the empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants in contrast this paper analy

what explains the rise in ceo pay in germany a panel data analysis for 1977 2009 the compensation of executive board members in germany has become a highly controversial topic since vodafone s hostile takeover of mannesmann in 2000 and it is again in the spotlight since the outbreak of the financial crisis of 2009 based on unique panel data evidence of the 500 largest firms in germany in the period 1977 2009 we test two prominent hypothesis in the literature on executive pay the manager power hypothesis and the efficient pay hypothesis we find support for the manager power hypothesis for germany as executives tend to be rewarded when the sector is doing well rather than the firm they work for we reject however the efficient pay hypothesis as ceo pay and the demand for managers increases in germany in difficult times when the typical firm size shrinks we find further that domestic and global competition for managers has contributed to the rise in executive pay in germany lastly we show that ceos in the banking sector are provided with incentives for performance and that the great recession of 2009 acted as a disciplining devise on ceo pay in germany

risk preference and the work leisure trade off the paper investigates the interrelationships between the wage rate period of employment work leisure choice and the attitude toward risk the model makes risk preference endogenous given external forces acting on individual choice beginning with assumptions normally considered consistent with risk aversion namely concave utility with respect to leisure and wealth along with perfect markets rational behavior consistent with the insurance buying gambler is shown to be a reasonable possibility the theory also provides an explanation for the repeating gambler paradox

gambles and the shadow price of death recent papers on the value of life involve preferences of the sort introduced by milton friedman and leonard savage 1948 1 given the choice between undergoing a particular gamble in wealth and possessing the mathematical expectation of the payoffs of the gamble the consumers in these studies may prefer the gamble the presence of such risk loving preferences is inferred from two well established facts life is an indivisible commodity in the models and indivisibility leads to preference for gambles the former fact is made clear by philip cook and daniel graham the latter was first noted by yew kwang ng 1965 and is widely known in spite of the obvious connection the implications of risk loving tastes in this area have not been explored this paper examines some implications of such risk loving the idea that indivisibility produces friedman savage preferences and that such preferences create a demand for gambles is extended in section i to a theory of demand for indivisible goods and derived demand for associated optimum gambles this theory suggests that the price of an indivisible good will not compensate for possessing or not possessing the good section ii applies the demand theory to an equilibrium model of labor supply that is relevant to the determination of the value of life in this model the wage diflerential is useful in guiding policy toward public risks in spite of the fact that the differential is not compensating i demand for gambles and demand for goods

asymmetric treatment of reported pension expense and income amounts in ceo cash compensation calculations abstract we provide evidence that ceo cash compensation is relatively less sensitive to pension expense than pension income suggesting that compensation committees shield ceo cash compensation from pension expense amounts we also provide evidence that managers use relatively higher expected rate of return estimates when reporting pension income suggesting that managers select income increasing accounting estimates in response to compensation committees greater emphasis on pension income in ceo cash compensation determinations pension cost amounts represent a unique setting to examine such behavior as their effect on ceo cash compensation can be detrimental or beneficial but arise from the same underlying economic activity

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

total board remuneration and company performance using a hitherto neglected source of data this paper combines executive emoluments with executive options to construct a broader measure of executive pay than has been possible in earlier british studies the result of including the long term share option component of pay along with the more commonly utilized short term component of emoluments is to reveal executive pay as being significantly more sensitive to company performance than has previously been thought to be the case the paper questions the current policy stance of british institutional investors and of the greenbury committee with respect to executive share options copyright 1996 by royal economic society

vertical coordination antitrust law and international trade this paper demonstrates that vertically aligned private or public organizations are capable of generating strategic trade advantage similar to that acquired through direct government export subsidization the model considers two forms of vertical coordination that lead to advantageous trade positions in international markets upstream vertical restraint and downstream equity sharing such practices are commonly employed both by state trading agencies and by private firms in nations with lenient antitrust laws the finding has important implications under new world trade organization wto rules intended to reduce government intervention in international transactions recent reforms in the wto favor nations that sanction highly refined vertical linkages between firms while nations with stringent antitrust legislation have an incentive to negotiate for greater harmonization of international laws

corporate performance and managerial remuneration an empirical analysis abstract economic theories of efficient compensation predict a positive relationship between executive pay and corporate performance and yet efforts to document this relationship have been largely unsuccessful in this paper we argue that previous cross sectional studies have omitted important variables which seriously bias their results using data that focus on individual executives over time we find that executive compensation is strongly positively related to corporate performance as measured by shareholder return and growth in firm sales the results are robust to the stock market performance measure utilized

equilibrium warrant pricing models and accounting for executive stock options under apb opinion no 25 compensation expense arising from executive stock options consists of the excess of the market value of the stock over the exercise price of the options on their grant dates if the exercise price equals the market value of the stock on the grant date which is typically the case no compensation expense is recognized this accounting treatment has been frequently criticized for its bias toward underestimating the cost of an option to the issuing firm and a number of alternative valuation models have been suggested in the accounting literature by and large these valuation models have been borrowed from the finance literature where they were developed to explain the pricing of warrants and traded options the purpose of this paper is to assess empirically how well two of these valuation models perform in providing estimates of the value of traded securities warrants that are similar in many respects to executive stock options 2 this evidence should help calibrate the magnitude of the errors

profit sharing with workers facilitates collusion among firms we show how profit sharing by firms with workers facilitates collusion among firms in a dynamic oligopoly environment with uncertain demand we first show that firm profits can always be increased by tying wages to market conditions the optimal agreement takes the form of an option and features partial sharing because increased sharing raises the expected price wage differential but reduces price wage variability we then show that given any cartel there exist market conditions such that simply giving some expected profit to workers raises expected firm profits via the transfer s impact on the incentive to cheat on the cartel

risk aversion performance pay and the principal agent problem this paper calculates numerical solutions to the principal agent problem and compares the results to the stylized facts of ceo compensation the numerical predictions come from parameterizing the models of grossman and hart and of holmstrom and milgrom while the correct incentives for a ceo can greatly enhance a firm s performance providing such incentives need not be expensive for many parameter values ceo compensation need increase only by about 10 for every 1 000 of additional shareholder value for some values the amount is 0 003 cents

managerial incentives and collusive behavior abstract i characterize the effects of empirically observed managerial incentives on long run oligopolistic competition when managers have a preference for smooth time paths of profits as revealed by the empirical literature on income smoothing manager led firms can sustain collusive agreements at lower discount factors capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor independent of contracts duration when managers have these preferences incentives and demand fluctuates price wars during booms need not occur the most collusive price may then be pro cyclical

the marginal utility of income does not increase borrowing lending and friedman savage gambles there has been a great deal of discussion about whether the marginal utility of income rises with income most notably milton friedman and leonard j savage argued in their classic paper that the willingness to gamble implies that the marginal utility of income is rising over a range the discussions of rising marginal utility and of friedman savage gambles have proceeded independently of the literature on time preference although the issues are in fact related logically drawing on this logical relationship we shall show 1 that at least when intertemporal utility is separable the stable levels of consumption that are usually observed imply that the marginal utility of income decreases as income rises 2 even if the marginal utility of income does increase friedman savage gambles normally will not maximize utility saving and dissaving can attain the levels of consumption which generate the most utility per dollar of income at a lower cost than gambles unless imperfections in the capital market are severe 3 even when the utility function is not temporally separable repeated gambling cannot be a rational way of dealing with a rising marginal utility of income we therefore conclude that observed gambling is seldom if ever explained by the logic set out in friedman and savage s seminal paper in view particularly of the stability of consumption levels and the lack of friedmansavage gambles we conclude that marginal utility of income does not rise with income i a conceptual framework

optimal strike prices of stock options for effort averse executives abstract this paper evaluates the common practice of setting the strike prices of executive option plans at the money hall and murphy hall brian murphy kevin j 2000 optimal exercise prices for executive stock options american economic review 90 2 209 214 claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance however they do not incorporate effort and the possibility that managers are effort averse into their model we revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages options and stock grants we simulate the manager s effort choice and compensation as well as the value of shareholders equity under alternative compensation schemes and identify schemes that are optimal our simulations indicate that when abstracting from tax considerations it is optimal to award managers with options that will most likely be highly valuable i e substantially in the money on their expiration date prior to 2006 the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006

divisionalization and strategic managerial incentives in oligopoly under uncertainty abstract this paper argues that divisionalization and incentive contracting are complementary rent shifting tools in the presence of demand uncertainty the role for divisionalization arises if managers know the state of demand prior to making output decisions and if incentive contracts are linear and non state contingent in this context incentive contracts achieve expected stackelberg outcomes but have no impact on the firm s responsiveness to demand shocks divisionalization on the other hand has the strategically beneficial effect of making the firm more responsive to demand shocks

reward design and ceo succession in the uk previous research has shown that top executives often rise to the peak of their organizations after a long term employment relationship and that internal promotion to the top is reflected in enhanced baseline salaries using data from a representative sample of uk companies the links between the fixed and variable elements of the chief executive officer s compensation package are examined and whether the appointment has been promoted internally or recruited from outside of the company from this analysis it is concluded that the positive impact on basic pay of elevation to the top job from within the company is not present in total compensation or the structure of pay it also emerges that although tenure does not significantly impact on the structure of pay it does alter total reward through its impact on the value of options granted longer company tenure reduces both the award of share options and the total value of the remuneration package job tenure on the other hand raises the executive s rew

tenure promotion and executive remuneration commentators frequently remark on the need to pay high levels of chief executive officer remuneration to attract motivate and retain the best executives for britain s leading companies this paper presents the results of an empirical investigation into tenure promotion and executive remuneration the remuneration of the chief executive officers at some of britain s largest businesses is examined in the majority of cases the ceo had not been lured away from rivals but had risen through the internal labour market often after a long term employment relationship moreover long job tenure and internal promotion were associated with higher levels of pay it is concluded that understanding of this controversial issue will be improved if it is recognized that a part of current executive pay may be a reward for previous successful performance