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CEO pay and the Lake Wobegon Effect

  • Hayes, Rachel M.
  • Schaefer, Scott
Registered author(s):

    The "Lake Wobegon Effect," which is widely cited as a potential cause for rising CEO pay, is said to occur because no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO's pay package to lag market expectations. We develop a game-theoretic model of this Effect. In our model, a CEO's wage may serve as a signal of match surplus, and therefore affect the value of the firm. We compare equilibria of our model to a full-information case and derive conditions under which equilibrium wages are distorted upward.

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    File URL: http://www.sciencedirect.com/science/article/B6VBX-4WW2SR9-1/2/5cd563cad756353cbd26c2d4e0ca337b
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 94 (2009)
    Issue (Month): 2 (November)
    Pages: 280-290

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    Handle: RePEc:eee:jfinec:v:94:y:2009:i:2:p:280-290
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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    14. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
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