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Incentives, Learning, and Compensation: A Theoretical and Empirical Investigation of Managerial Labor Contracts

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Kevin J. Murphy

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Abstract

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 experience-earnings 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.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28198621%2917%3A1%3C59%3AILACAT%3E2.0.CO%3B2-Y&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 17 (1986)
Issue (Month): 1 (Spring)
Pages: 59-76
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Handle: RePEc:rje:randje:v:17:y:1986:i:spring:p:59-76

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  1. Derek Neal & Sherwin Rosen, 1998. "Theories of the Distribution of Labor Earnings," NBER Working Papers 6378, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Igal Hendel & Alessandro Lizzeri, 2000. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," NBER Working Papers 7470, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Corinne Alexander & Rachael Goodhue & Gordon Rausser, 2000. "Do Quality Incentives Matter?," Department of Agricultural & Resource Economics, UC Davis, Working Paper Series 1038, Department of Agricultural & Resource Economics, UC Davis. [Downloadable!]
  4. Kose John & Hamid Mehran & Yiming Qian, 2007. "Regulation, subordinated debt, and incentive features of CEO compensation in the banking industry," Staff Reports 308, Federal Reserve Bank of New York. [Downloadable!]
  5. Felipe Balmaceda, . "Compensation Methods in Competitive Labor Markert," ILADES-Georgetown University Working Papers inv118, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  6. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA. [Downloadable!]
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  8. Felipe Balmaceda, 2002. "Compensation Methods in a Competitive Labor Market: the Role of Asymmetric Information," Documentos de Trabajo 139, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  9. Rebecca S. Demsetz & Marc R. Saidenberg, 1999. "Looking beyond the CEO: executive compensation at banks," Staff Reports 68, Federal Reserve Bank of New York. [Downloadable!]
  10. repec:fth:prinin:431 is not listed on IDEAS
  11. Canice Prendergast, 1996. "What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies," NBER Working Papers 5802, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Fredrik Andersson & Matthew Freedman & John C. Haltiwanger & Julia Lane & Kathryn L. Shaw, 2006. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," NBER Working Papers 12435, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Robert Gibbons & Michael Waldman, 1998. "A Theory of Wage and Promotion Dynamics in Internal Labor Markets," NBER Working Papers 6454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Vicente Cuñat & Maria Guadalupe, 2006. "Globalization and the Provision of Incentives Inside the Firm: The Effect of Foreign Competition," IZA Discussion Papers 2408, Institute for the Study of Labor (IZA). [Downloadable!]
  15. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Really Paid Like Bureaucrats?," NBER Working Papers 6213, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Marianne Bertrand & Sendhil Mullainathan, 2000. "Do CEOs Set Their Own Pay? The Ones Without Principals Do," Working Papers 810, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
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