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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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File URL: http://dx.doi.org/10.1086/261931
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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  2. 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.
  3. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
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  8. N/A, 1983. "Chapter I. the Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 104(1), pages 6-20, May.
  9. 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.
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  12. M. J. DRISCOLL & J. J. A. PLESSIS & J.L. Ford, 1983. "Monetary Aggregates and Economic Activity: Reply," South African Journal of Economics, Economic Society of South Africa, vol. 51(2), pages 217-222, 06.
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  15. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  16. Joseph G. Haubrich, 2001. "Sharing with a risk-neutral agent," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-8.
  17. Michael C. Jensen & Kevin J. Murphy, 1990. "Ceo Incentives - It'S Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(3), pages 36-49.
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  27. N/A, 1983. "Chapter II. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 106(1), pages 26-38, November.
  28. N/A, 1983. "Chapter I. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 106(1), pages 5-25, November.
  29. N/A, 1983. "Chapter I. the Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 103(1), pages 6-29, February.
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