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When to fire a CEO: optimal termination in dynamic contracts

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Author Info

  • Spear, Stephen E.
  • Wang, Cheng

Abstract

The repeated agency model has been widely applied to a number of interesting and important problems in economics, though in many instances, the fact that the standard model generates transient dynamics limits the usefulness of the results obtained from the model for the simple reason that purely transient dynamc phenomena are empirically irrelevant since they cannot be systematically observed and studied. \ In this paper, we show to embed the standard long-term contracting model in an economic environment in which the inherently transient dynamics of the model are transformed into dyanmics which are stationary and ergodic. \ We then use the model to study CEO termination and issues of corporate takeover.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 120 (2005)
Issue (Month): 2 (February)
Pages: 239-256

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Handle: RePEc:eee:jetheo:v:120:y:2005:i:2:p:239-256

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
  3. Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers 5170, Iowa State University, Department of Economics.
  4. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
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Citations

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Cited by:
  1. Martinez Leonardo, 2009. "Reputation, Career Concerns, and Job Assignments," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-29, May.
  2. Oliver Fabel & Martin Kolmar, 2007. "On 'Golden Parachutes' as Manager Discipline," TWI Research Paper Series 17, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  3. Hiroshi Osano & Keiichi Hori, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," KIER Working Papers 863, Kyoto University, Institute of Economic Research.
  4. Leonardo Martinez, 2008. "A theory of political cycles," Working Paper 05-04, Federal Reserve Bank of Richmond.
  5. Bushman, Robert & Dai, Zhonglan & Wang, Xue, 2010. "Risk and CEO turnover," Journal of Financial Economics, Elsevier, vol. 96(3), pages 381-398, June.
  6. Cheng Wang, 2012. "Optimal Self-enforcing and Termination," 2012 Meeting Papers 433, Society for Economic Dynamics.
  7. Ohlendorf, Susanne & Schmitz, Patrick W., 2011. "Repeated moral hazard and contracts with memory: The case of risk-neutrality," MPRA Paper 28823, University Library of Munich, Germany.
  8. Jin, Yu, 2010. "Credit Termination and the Technology Bubbles," MPRA Paper 29010, University Library of Munich, Germany.
  9. Fabel, Oliver & Kolmar, Martin, 2012. "Do parachutes discipline managers? An analysis of takeover battles," International Review of Law and Economics, Elsevier, vol. 32(2), pages 224-232.
  10. Wang, Cheng, 2005. "Termination of Dynamic Contracts in an Equilibrium Labor Market Model," Staff General Research Papers 12403, Iowa State University, Department of Economics.
  11. Catherine Casamatta & Alexander Guembel, 2010. "Managerial Legacies, Entrenchment, and Strategic Inertia," Journal of Finance, American Finance Association, vol. 65(6), pages 2403-2436, December.
  12. Ulf Axelson & Philip Bond, 2011. "Investment banking careers: An equilibrium theory of overpaid jobs," FMG Discussion Papers dp690, Financial Markets Group.
  13. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers 12704, Iowa State University, Department of Economics.
  14. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  15. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Wang, Cheng, 2011. "Termination of dynamic contracts in an equilibrium labor market model," Journal of Economic Theory, Elsevier, vol. 146(1), pages 74-110, January.
  17. Ronald W. Anderson & Maria Cecilia Bustamante & Stéphane Guibaud, 2012. "Agency, firm growth, and managerial turnover," LSE Research Online Documents on Economics 43144, London School of Economics and Political Science, LSE Library.

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