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Executive compensation: a calibration approach

Author

Listed:
  • Ivilina Popova

    (Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA)

  • Joseph G. Haubrich

    (Research Department, Federal Reserve Bank of Cleveland, Cleveland, OH 44101-1387, USA)

Abstract

We use a version of the Grossman and Hart principal-agent model with 10 actions and 10 states to produce quantitative predictions for executive compensation. Performance incentives derived from the model are compared with the performance incentives of 350 firms chosen from a survey by Michael Jensen and Kevin Murphy. The results suggest both that the model does a reasonable job of explaining the data and that actual incentives are close to the optimal incentives predicted by theory.

Suggested Citation

  • Ivilina Popova & Joseph G. Haubrich, 1998. "Executive compensation: a calibration approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 561-581.
    • Handle: RePEc:spr:joecth:v:12:y:1998:i:3:p:561-581
    Note: Received: August 12, 1997; revised version: October 27, 1997
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    1. Cecchetti, Stephen G. & Lam, Pok-sang & Mark, Nelson C., 1993. "The equity premium and the risk-free rate : Matching the moments," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 21-45, February.
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    Cited by:

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    2. Henry Penikas, 2012. "An Optimal Incentive Contract Preventing Excessive Risk-Taking by a Bank Manager," HSE Working papers WP BRP 03/FE/2012, National Research University Higher School of Economics.
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    4. Ingolf Dittmann & Ernst Maug, 2007. "Lower Salaries and No Options? On the Optimal Structure of Executive Pay," Journal of Finance, American Finance Association, vol. 62(1), pages 303-343, February.
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    More about this item

    Keywords

    Calibration · Executive compensation · Principal-agent.;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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