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Executive compensation: a calibration approach

  • 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)

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.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 12 (1998)
Issue (Month): 3 ()
Pages: 561-581

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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. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  2. Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
  3. S.G. Cecchetti & P. Lam & N.C. Mark, 2010. "The equity premium and the risk-free rate: matching the moments," Levine's Working Paper Archive 1396, David K. Levine.
  4. Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
  5. 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.
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