Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion
AbstractIt is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if CRRA preferences are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.
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Date of creation: Oct 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-10 (All new papers)
- NEP-BEC-2012-04-10 (Business Economics)
- NEP-CTA-2012-04-10 (Contract Theory & Applications)
- NEP-HRM-2012-04-10 (Human Capital & Human Resource Management)
- NEP-UPT-2012-04-10 (Utility Models & Prospect Theory)
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