IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/v102y1994i2p258-76.html
   My bibliography  Save this article

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

Author

Listed:
  • Haubrich, Joseph G

Abstract

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.

Suggested Citation

  • Haubrich, Joseph G, 1994. "Risk Aversion, Performance Pay, and the Principal-Agent Problem," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 258-276, April.
    • Handle: RePEc:ucp:jpolec:v:102:y:1994:i:2:p:258-76
    DOI: 10.1086/261931
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/261931
    File Function: full text
    Download Restriction: Access to full text is restricted to subscribers. See http://www.journals.uchicago.edu/JPE for details.
    File URL: https://libkey.io/10.1086/261931?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
    2. repec:bla:jfinan:v:43:y:1988:i:3:p:593-616 is not listed on IDEAS
    3. Joseph G. Haubrich, 2001. "Sharing with a risk-neutral agent," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-8.
    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. Michael C. Jensen & Kevin J. Murphy, 2010. "CEO Incentives—It's Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 64-76, January.
    6. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    7. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    8. 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.
    9. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    10. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    11. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    12. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
    13. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    14. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    2. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    3. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2003. "CEO turnover and properties of accounting information," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 197-226, December.
    4. Alex Edmans & Xavier Gabaix & Augustin Landier, 2007. "A Calibratable Model of Optimal CEO Incentives in Market Equilibrium," NBER Working Papers 13372, National Bureau of Economic Research, Inc.
    5. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    6. Hall, Brian J. & Murphy, Kevin J., 2002. "Stock options for undiversified executives," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 3-42, February.
    7. Kraft, Kornelius & Niederprum, Antonia, 1999. "Determinants of management compensation with risk-averse agents and dispersed ownership of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 40(1), pages 17-27, September.
    8. Cichello, Michael S., 2005. "The impact of firm size on pay-performance sensitivities," Journal of Corporate Finance, Elsevier, vol. 11(4), pages 609-627, September.
    9. J. Eric Bickel, 2006. "Some Determinants of Corporate Risk Aversion," Decision Analysis, INFORMS, vol. 3(4), pages 233-251, December.
    10. He, Xiaoxiao & Zhu, Margaret Rui, 2020. "Are interim CEOs just caretakers?," Journal of Corporate Finance, Elsevier, vol. 61(C).
    11. Nahum D. Melumad, 1989. "Asymmetric information and the termination of contracts in agencies," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 733-753, March.
    12. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    13. Chaigneau, Pierre, 2013. "Explaining the structure of CEO incentive pay with decreasing relative risk aversion," Journal of Economics and Business, Elsevier, vol. 67(C), pages 4-23.
    14. Clément Carbonnier, 2023. "Welfare Economics and Neoliberalism: Interpreting the ideal type of perfect competition general equilibrium," SciencePo Working papers Main hal-04062786, HAL.
    15. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
    16. Neunzig, Alexander R., 2002. "Effiziente Fixlöhne, Arbeitsfreude und Crowding-Effekte," CSLE Discussion Paper Series 2002-03, Saarland University, CSLE - Center for the Study of Law and Economics.
    17. de La Bruslerie, H. & Deffains-Crapsky, C., 2008. "Information asymmetry, contract design and process of negotiation: The stock options awarding case," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 73-91, April.
    18. Renneboog, L.D.R. & Trojanowski, G., 2002. "The Managerial Labor Market and the Governance Role of Shareholder Control Structures in the UK," Other publications TiSEM aee04553-20a7-475a-96e1-7, Tilburg University, School of Economics and Management.
    19. Palomino, Frederic & Prat, Andrea, 2003. "Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-137, Spring.
    20. Benoît Pigé, 1997. "Le marché boursier réagit-il à l'annonce des changements de dirigeants ?," Post-Print hal-02175842, HAL.
    21. Hayes, Rachel M. & Schaefer, Scott, 1999. "How much are differences in managerial ability worth?," Journal of Accounting and Economics, Elsevier, vol. 27(2), pages 125-148, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:v:102:y:1994:i:2:p:258-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JPE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.