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Why Has CEO Pay Increased So Much?

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Author Info
Xavier Gabaix
Augustin Landier

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Abstract

This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO%u2019s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12365.

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Date of creation: Jul 2006
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Handle: RePEc:nbr:nberwo:12365

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Find related papers by JEL classification:
D2 - Microeconomics - - Production and Organizations
D3 - Microeconomics - - Distribution
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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