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Matching Firms, Managers, and Incentives

  • Oriana Bandiera
  • Luigi Guiso
  • Andrea Prat
  • Raffaella Sadun

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1144.

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Date of creation: May 2012
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Handle: RePEc:cep:cepdps:dp1144
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