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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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    References listed on IDEAS

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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.
    2. Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, pages 258-276.
    3. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    4. Holderness, Clifford G. & Sheehan, Dennis P., 1991. "Monitoring an owner*1: The case of Turner broadcasting," Journal of Financial Economics, Elsevier, vol. 30(2), pages 325-346, December.
    5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
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    Citations

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    Cited by:

    1. Jorge Aseff & Manuel Santos, 2005. "Stock options and managerial optimal contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 813-837.
    2. Josef Schroth, 2015. "Managerial Compensation Duration and Stock Price Manipulation," Staff Working Papers 15-25, Bank of Canada.
    3. Ingolf Dittmann & Ernst Maug & Oliver Spalt, 2010. "Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse," Journal of Finance, American Finance Association, vol. 65(6), pages 2015-2050, December.
    4. Maug, Ernst & Dittmann, Ingolf, 2007. "Lower salaries and no options : the optimal structure of executive pay
      [Lower salaries and no options? On the optimal structure of executive pay]
      ," Papers 07-41, Sonderforschungsbreich 504.
    5. 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.
    6. Hueth, Brent & Ligon, Ethan, 2003. "On the Efficacy of Contractual Provisions for Processing Tomatoes," 2003 Annual meeting, July 27-30, Montreal, Canada 21990, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    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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