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Implicit contracts, managerial incentives and financial structure

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  • Dessi, Roberta

Abstract

This paper examines how managers may be given incentives to exert effort, and to implement efficient implicit contracts with workers. Under certain assumptions, this can be achieved by tying managerial compensation to shareholder value. However, if reputation effects are weak, it is more efficient to adopt an incentive scheme in which the manager is punished by outside investor intervention when performance falls below a critical level, and otherwise retains control, receiving a fixed reward. The required form of outside intervention can be implemented through a financial structure combining "hard" debt with a relatively dispersed ownership structure.

Suggested Citation

  • Dessi, Roberta, 1997. "Implicit contracts, managerial incentives and financial structure," LSE Research Online Documents on Economics 119162, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119162
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    File URL: http://eprints.lse.ac.uk/119162/
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    References listed on IDEAS

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    Cited by:

    1. Nier, Erlend, 1998. "Managers, debt and industry equilibrium," LSE Research Online Documents on Economics 119152, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    implicit contracts; managerial incentives; financial structure; debt; ownership concentration;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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