IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The effect of monitoring on CEO pay practices in a matching equilibrium

  • Pierre Chaigneau
  • Nicolas Sahuguet

We present a model of efficient contracting with endogenous matching and limited monitoring in which firms compete for CEOs. The model explains the association between limited monitoring and CEO pay practices such as pay-for-luck, high salaries, a low pay-performance sensitivity, and a more asymmetric pay-for-performance relation. The results are driven by the matching equilibrium: firms with different capacities for monitoring hire different types of CEOs and offer different compensation contracts. The model thus responds to some fundamental arguments of the managerial power perspective.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://eprints.lse.ac.uk/55405/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 55405.

as
in new window

Length: 40 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:ehl:lserod:55405
Contact details of provider: Postal:
LSE Library Portugal Street London, WC2A 2HD, U.K.

Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Gerald Garvey & Todd Milbourn, 2003. "Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section," Journal of Finance, American Finance Association, vol. 58(4), pages 1557-1582, 08.
  2. Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
  3. Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
  4. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
  5. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
  6. Oyer, Paul, 2001. "Why Do Firms Use Incentives That Have No Incentive Effects?," Research Papers 1686, Stanford University, Graduate School of Business.
  7. Acharya, Viral V & Volpin, Paolo, 2008. "Corporate Governance Externalities," CEPR Discussion Papers 6627, C.E.P.R. Discussion Papers.
  8. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
  9. Philippe Aghion & John Van Reenen & Luigi Zingales, 2009. "Innovation and Institutional Ownership," CEP Discussion Papers dp0911, Centre for Economic Performance, LSE.
  10. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," CESifo Working Paper Series 3277, CESifo Group Munich.
  11. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
  12. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  13. Brian D. Bell & John Van Reenen, 2013. "Extreme Wage Inequality: Pay at the Very Top," American Economic Review, American Economic Association, vol. 103(3), pages 153-57, May.
  14. Alex Edmans & Xavier Gabaix, 2009. "Tractability in Incentive Contracting," NBER Working Papers 15545, National Bureau of Economic Research, Inc.
  15. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  16. Inderst, Roman & Müller, Holger, 2009. "CEO replacement under private information," IMFS Working Paper Series 29, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  17. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2010. "Matching Firms, Managers, and Incentives," Harvard Business School Working Papers 10-073, Harvard Business School, revised Aug 2011.
  18. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
  19. Vicente Cuñat & Maria Guadalupe, 2009. "Globalization and the Provision of Incentives inside the Firm: The Effect of Foreign Competition," Journal of Labor Economics, University of Chicago Press, vol. 27(2), pages 179-212, 04.
  20. Taylor, Lucian A., 2013. "CEO wage dynamics: Estimates from a learning model," Journal of Financial Economics, Elsevier, vol. 108(1), pages 79-98.
  21. Roth, Alvin E & Sotomayor, Marilda, 1989. "The College Admissions Problem Revisited," Econometrica, Econometric Society, vol. 57(3), pages 559-70, May.
  22. Mark R. Huson, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
  23. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 901-932.
  24. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
  25. Agrawal, Anup & Knoeber, Charles R. & Tsoulouhas, Theofanis, 2006. "Are outsiders handicapped in CEO successions?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 619-644, June.
  26. Alex Edmans & Xavier Gabaix, 2011. "The Effect of Risk on the CEO Market," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2822-2863.
  27. Cornelli, Francesca & Kominek, Zbigniew & Ljungqvist, Alexander P., 2009. "Monitoring Managers: Does it Matter?," CEPR Discussion Papers 7571, C.E.P.R. Discussion Papers.
  28. Bengt Holmstrom & Joan Ricart i Costa, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 835-860.
  29. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  30. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
  31. Shivaram Rajgopal & Terry Shevlin & Valentina Zamora, 2006. "CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts," Journal of Finance, American Finance Association, vol. 61(4), pages 1813-1844, 08.
  32. Oyer, Paul & Schaefer, Scott, 2005. "Why do some firms give stock options to all employees?: An empirical examination of alternative theories," Journal of Financial Economics, Elsevier, vol. 76(1), pages 99-133, April.
  33. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
  34. Steven N. Kaplan & Bernadette A. Minton, 2012. "How Has CEO Turnover Changed?," International Review of Finance, International Review of Finance Ltd., vol. 12(1), pages 57-87, 03.
  35. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
  36. Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
  37. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:55405. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.