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Why Has CEO Pay Increased So Much?

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  • Xavier Gabaix

    (New York University and National Bureau of Economic Research)

  • Augustin Landier

    (New York University)

Abstract

This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO's pay depends on both the size of his firm and the aggregate firm size. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. In recent decades at least, the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. In particular, in the baseline specification of the model's parameters, the sixfold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the sixfold increase in market capitalization of large companies during that period. (c) 2008 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 123 (2008)
Issue (Month): 1 (02)
Pages: 49-100

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Handle: RePEc:tpr:qjecon:v:123:y:2008:i:1:p:49-100

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References

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  1. Some identification problems in the debate on taxing top earners
    by Stephen Gordon in Worthwhile Canadian Initiative on 2011-12-09 18:00:37
  2. Can demographics explain why the income shares of high earners have increased?
    by Stephen Gordon in Worthwhile Canadian Initiative on 2011-09-18 21:22:12
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