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Managerial Compensation and the Cost of Moral Hazard

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  • Margiotta, Mary M
  • Miller, Robert A
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    Abstract

    This article investigates managerial compensation and its incentive effects. Our econometric framework is derived from a multiperiod principal-agent model with moral hazard. Longitudinal data on returns to firms and managerial compensation are used to estimate the model. We find that firms would incur large losses from ignoring moral hazard, whereas managers only require moderate additional compensation for accepting a contract that ties their wealth to the value of the firm. Thus the costs of aligning hidden managerial actions to shareholder goals through the compensation schedule are much less than the benefits from the resulting managerial performance. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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    Bibliographic Info

    Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

    Volume (Year): 41 (2000)
    Issue (Month): 3 (August)
    Pages: 669-719

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    Handle: RePEc:ier:iecrev:v:41:y:2000:i:3:p:669-719

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    Cited by:
    1. Adam Copeland & Cyril Monnet, 2003. "The welfare effects of incentive schemes," Finance and Economics Discussion Series 2003-08, Board of Governors of the Federal Reserve System (U.S.).
    2. Bin R. Chen & Y. Stephen Chiu, 2013. "Interim Performance Evaluation in Contract Design," Economic Journal, Royal Economic Society, vol. 123, pages 665-698, 06.
    3. Brown, Zachary S. & Bellemare, Marc F., 2009. "The Structural Estimation of Principal-Agent Models by Least Squares: Evidence from Land Tenancy in Madagascar," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49368, Agricultural and Applied Economics Association.
    4. George-Levi Gayle & Limor Golan & Robert Miller, . "Are There Glass Ceilings for Female Executives?," GSIA Working Papers 2009-E8, Carnegie Mellon University, Tepper School of Business.
    5. George-Levi Gayle & Limor Golan & Robert A. Miller, . "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers 2008-E32, Carnegie Mellon University, Tepper School of Business.
    6. Pierre André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series 738, CESifo Group Munich.
    7. Brenner, Steffen, 2011. "On the irrelevance of insider trading for managerial compensation," European Economic Review, Elsevier, vol. 55(2), pages 293-303, February.
    8. Zheng, Xiaoyong & Vukina, Tomislav, 2007. "Efficiency gains from organizational innovation: Comparing ordinal and cardinal tournament games in broiler contracts," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 843-859, August.
    9. George-Levi Gayle & Robert A. Miller, 2009. "Has Moral Hazard Become a More Important Factor in Managerial Compensation?," American Economic Review, American Economic Association, vol. 99(5), pages 1740-69, December.
    10. Arantxa Jarque, 2008. "CEO compensation : trends, market changes, and regulation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 265-300.

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