A calibratable model of optimal ceo incentives in market equilibrium
By: Alex Edmans, Xavier Gabaix, Augustin Landier
Contributors: Gabaix, Xavier; Landier, Augustin; National Bureau of Economic Research
Series: NBER working paper series -- working paper 13372; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13372.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "This paper presents a unified framework for understanding the determinants of both CEO incentives and total pay levels in competitive market equilibrium.  It embeds a modified principal-agent problem into a talent assignment model to endogenize both elements of compensation.  The model's closed form solutions yield testable predictions for how incentives should vary across firms under optimal contracting.  In particular, our calibrations show that the negative relationship between the CEO's effective equity stake and firm size is quantitatively consistent with efficiency and need not reflect rent extraction.  Our model and data both also imply that the dollar change in wealth for a percentage change in firm value, scaled by annual pay, is independent of firm size.  This may render it an attractive incentive measure as it is comparable between firms and over time.  The theory also predicts a positive relationship between pay volatility and firm volatility, and that risk and effort affect total pay along the cross-section but not in the aggregate.  Finally, we demonstrate that incentive compensation is effective at solving large agency problems, such as selecting corporate strategy, but smaller issues such as perk consumption are best addressed through direct monitoring"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 9/10/2007.

Includes bibliographical references.

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Mode of access: World Wide Web.