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Implicit Contracts, Managerial Incentives, and Financial Structure

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  • Roberta Dessí

Abstract

This paper examines how managers may be given incentives to exert effort, and to implement efficient implicit contracts with workers. Under certain assumptions, this can be achieved by tying managerial compensation to shareholder value. However, if reputation effects are weak, it is more efficient to adopt an incentive scheme in which the manager is punished by outside investor intervention when performance falls below a critical level, and otherwise retains control, receiving a fixed reward. The required form of outside intervention can be implemented through a financial structure combining hard debt with a dispersed ownership structure.

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  • Roberta Dessí, 2001. "Implicit Contracts, Managerial Incentives, and Financial Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 359-390, September.
    • Handle: RePEc:bla:jemstr:v:10:y:2001:i:3:p:359-390
    DOI: 10.1111/j.1430-9134.2001.00359.x
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    Cited by:

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    3. Erlend Nier, 1998. "Managers, Debt and Industry Equilibrium," FMG Discussion Papers dp289, Financial Markets Group.

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