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Corporate Board Structure, Managerial self-Dealing, and Common Agency

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Vinicius Carrasco () (Department of Economics PUC-Rio.)
Abstract

Corporate Boards usually come in two different shapes: unitary and dual. In the former, a single board/principal is responsible for monitoring and establishing performance targets; in the latter, these tasks are split between two boards/principals. This paper compares these two arrangements in terms of corporate performance and managerial self-dealing for a situation in which the CEO has private information. The equilibrium set of the common agency game induced by the dual board structure is fully characterized. Compared to a single board, a dual board demands less aggressive performance targets from the CEO, but exerts more monitoring. An unambiguous consequence of the first feature is that the CEO always exerts less effort toward production with a dual board. Due to the reduction in performance targets, the effect of a dual board on CEO’s self-dealing is ambiguous: there are equilibria in which, in spite of the increase in monitoring, self-dealing is higher in a dual system..

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 523.

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Length: 31p.
Date of creation: May 2006
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Handle: RePEc:rio:texdis:523

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  1. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part II: Application to Missions and Accountability of Government Agencies," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 199-217, January. [Downloadable!] (restricted)
  2. David Martimort & Lars Stole, 2003. "Contractual Externalities and Common Agency Equilibria," The B.E. Journal of Theoretical Economics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  3. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
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  4. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business. [Downloadable!]
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  5. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-548, 04. [Downloadable!] (restricted)
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