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Career Concerns And Contingent Compensation

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  • Guillermo Caruana

    ()

  • Marco Celentani

    ()

Abstract

This paper considers a two-period model in which managers have superior information about their ability to forecast the realization of given investment projects. Firms compete for managers by offering short-run contracts. As future salaries depend on current play through its impact on managerial reputation, managers' investment decisions are affected by their concern for their future careers. We analyze the interaction between these implicit incentives, created by managers' career concerns, and the explicit incentives made possible by contingent compensation. We show that managers' career concerns create perverse incentives that are robust to the introduction of contingent contracting. We also find that while managerial compensation is monotonically increasing in profit at date 2, it is not at date 1. Two numerical exercises relate the implications of our results to the literature on the link between pay and performance. In line with empirical findings, we find that: i) the pay-performance sensitivity is highest in the final period of managers' employment; ii) higher pay-performance sensitivities are associated with a lower variance of profits.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we014811.

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Date of creation: Oct 2001
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Handle: RePEc:cte:werepe:we014811

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  1. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 1-42, January.
  2. Ricart I Costa, Joan E., 1989. "On managerial contracting with asymmetric information," European Economic Review, Elsevier, Elsevier, vol. 33(9), pages 1805-1829, December.
  3. Hirshleifer, David & Thakor, Anjan V, 1992. "Managerial Conservatism, Project Choice, and Debt," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 437-70.
  4. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 742, Cowles Foundation for Research in Economics, Yale University.
  5. Jeon, Seonghoon, 1998. "Reputational concerns and managerial incentives in investment decisions," European Economic Review, Elsevier, Elsevier, vol. 42(7), pages 1203-1219, July.
  6. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 288-307, April.
  7. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(3), pages 547-81, June.
  8. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 465-79, June.
  9. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  10. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 1 :comparing information structures," ULB Institutional Repository 2013/9617, ULB -- Universite Libre de Bruxelles.
  11. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
  12. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 828-62, August.
  13. Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1242, Cowles Foundation for Research in Economics, Yale University.
  14. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 757-70, September.
  15. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 2 :application to missions and accountability of government agencies," ULB Institutional Repository 2013/9641, ULB -- Universite Libre de Bruxelles.
  16. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 468-505, June.
  17. Ricart i Costa, Joan E, 1988. "Managerial Task Assignment and Promotions," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 449-66, March.
  18. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 1-25, February.
  19. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1105-34, December.
  20. Holmstrom, Bengt & Ricart i Costa, Joan, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(4), pages 835-60, November.
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Cited by:
  1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
  2. Jorge Aseff & Manuel Santos, 2005. "Stock options and managerial optimal contracts," Economic Theory, Springer, Springer, vol. 26(4), pages 813-837, November.
  3. Abel Elizalde & Rafael Repullo, 2004. "Economic And Regulatory Capital. What Is The Difference?," Working Papers, CEMFI wp2004_0422, CEMFI.
  4. Marco Celentani & Rosa Loveira & Pablo Ruiz-Verdú, 2010. "Executive Pay with Observable Decisions," Working Papers 2010-29, FEDEA.

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