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 firm 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 firm ensures that her interests are aligned with the goals of firm 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 Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 07.10.
Length: 27 pages
Date of creation: Sep 2007
Date of revision:
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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
More information through EDIRC
incentives; optimal contracting; stochastic discount factor;
Other versions of this item:
- Danthine, Jean-Pierre & Donaldson, John B, 2007. "Executive Compensation: The View from General Equilibrium," CEPR Discussion Papers 6555, C.E.P.R. Discussion Papers.
- Jean-Pierre Danthine & John B. Donaldson, 2007. "Executive Compensation: The View from General Equilibrium," Swiss Finance Institute Research Paper Series 07-33, Swiss Finance Institute.
- 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-2007-11-03 (All new papers)
- NEP-BEC-2007-11-03 (Business Economics)
- NEP-DGE-2007-11-03 (Dynamic General Equilibrium)
- NEP-MAC-2007-11-03 (Macroeconomics)
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