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Risk Aversion, Performance Pay, and the Principal-Agent Problem

  • Haubrich, Joseph G

This paper calculates numerical solutions to the principal-agent problem and compares the results to the stylized facts of CEO compensation. The numerical predictions come from parameterizing the models of Sanford J. Grossman and Oliver D. Hart (1983) and of Bengt Holmstrom and Paul Milgrom (1987). While the correct incentives for a CEO can greatly enhance a firm's performance, providing such incentives need not be expensive. For many parameter values, CEO compensation need increase only by about $10 for every $1,000 of additional shareholder value; for some values, the amount is 0.003 cents. Copyright 1994 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 102 (1994)
Issue (Month): 2 (April)
Pages: 258-76

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Handle: RePEc:ucp:jpolec:v:102:y:1994:i:2:p:258-76
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  1. repec:oup:restud:v:38:y:1971:i:114:p:175-208 is not listed on IDEAS
  2. Sheshinski, Eytan, 1989. "Note on the shape of the optimum income tax schedule," Journal of Public Economics, Elsevier, vol. 40(2), pages 201-215, November.
  3. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  4. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February.
  5. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
  6. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  7. 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.
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