Executive Compensation: The View from General Equilibrium
AbstractWe study the dynamic general equilibrium of an economy where risk averse shareholders delegate the management of the ¯rm to risk averse managers. The optimal contract has two main components: an incentive component corresponding to a non-tradable equity position and a variable 'salary' component indexed to the aggregate wage bill and to aggregate dividends. Tying a manager's compensation to the performance of her own ¯rm ensures that her interests are aligned with the goals of ¯rm owners and that maximizing the discounted sum of future dividends will be her objective. Linking managers' compensation to overall economic performance is also required to make sure that managers use the appropriate stochastic discount factor to value those future dividends.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-33.
Length: 30 pages
Date of creation: Sep 2007
Date of revision:
incentives; optimal contracting; stochastic discount factor;
Other versions of this item:
- Jean-Pierre DANTHINE & John B. DONALDSON, 2007. "Executive Compensation: The View from General Equilibrium," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 07.10, Université de Lausanne, Faculté des HEC, DEEP.
- Danthine, Jean-Pierre & Donaldson, John B, 2007. "Executive Compensation: The View from General Equilibrium," CEPR Discussion Papers 6555, C.E.P.R. Discussion Papers.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-01 (All new papers)
- NEP-BEC-2007-12-01 (Business Economics)
- NEP-DGE-2007-12-01 (Dynamic General Equilibrium)
- NEP-LTV-2007-12-01 (Unemployment, Inequality & Poverty)
- NEP-MAC-2007-12-01 (Macroeconomics)
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