Incentive Contracts for Overoptimistic Managers
This paper analyzes an optimal incentive contract for an overoptimistic manager who overestimates the investment potential of the firm. It shows that, compared with a rational manager, an overoptimistic manager is willing to accept a linear incentive contract with a lower fixed wage. At the same time, overoptimism also leads to overinvestment. Given the trade-off between lower labor cost and investment misallocation, we show that shareholders prefer to hire an overoptimistic manager when production is not capital intensive, when the output is not too volatile and when the manager has a higher reservation utility.
Volume (Year): 32 (2012)
Issue (Month): 2 ()
|Contact details of provider:|| |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:bla:joares:v:27:y:1989:i:1:p:21-39 is not listed on IDEAS
- Anand M. Goel & Anjan V. Thakor, 2005. "Green with Envy: Implications for Corporate Investment Distortions," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2255-2288, November.
- Anna Dodonova & Yuri Khoroshilov, 2006. "Optimal Incentive Contracts for Loss-Averse Managers: Stock Options versus Restricted Stock Grants," The Financial Review, Eastern Finance Association, vol. 41(4), pages 451-482, November.
- Anand M. Goel & Anjan V. Thakor, 2008. "Overconfidence, CEO Selection, and Corporate Governance," Journal of Finance, American Finance Association, vol. 63(6), pages 2737-2784, December.
When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-12-00119. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.