Industrial Structure, Executives' Pay And Myopic Risk Taking
AbstractThis study outlines a new theory linking industrial structure to optimal employment contracts and value reducing risk taking.� Firms hire their executives using optimal contracts derived within a competitive labour market.� To motivate effort firms must use some variable remuneration.� Such remuneration introduces a myopic risk taking problem: an executive would wish to inflate early expected earnings at some risk to future profits.� To manage this some bonus pay is deferred.� Convergence in size amongst the largest firms makes the cost of managing the myopic risk taking problem grow faster than the cost of managing the moral hazard problem.� Eventually the optimal contract jumps from one achieving zero myopic risk taking to one tolerating the possibility of myopic risk taking.� Under some conditions the industry partititions: the largest firms hire executives on contracts tolerant of myopic risk taking, smaller firms ensure myopia is ruled out.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 571.
Date of creation: 01 Oct 2011
Date of revision:
Myopic risk taking; Moral hazard; Compensation; Bonuses; Bankers' pay; Tail risk; Industrial structure;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-22 (All new papers)
- NEP-BEC-2011-10-22 (Business Economics)
- NEP-CFN-2011-10-22 (Corporate Finance)
- NEP-CIS-2011-10-22 (Confederation of Independent States)
- NEP-CTA-2011-10-22 (Contract Theory & Applications)
- NEP-LAB-2011-10-22 (Labour Economics)
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