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Matching Firms, Managers, and Incentives

  • Oriana Bandiera

    (London School of Economics)

  • Luigi Guiso

    (European University Institute and EIEF)

  • Andrea Prat

    (London School of Economics)

  • Raffaella Sadun

    (London School of Economics)

We provide evidence on the match between firms, managers and incentives using a new survey designed for this purpose. The survey contains information on a sample of executives’ risk preferences and human capital, on the explicit and implicit incentives they face and on the firms they work for. We model a market for managerial talent where both firms and managers are heterogeneous. Following the sources of heterogeneity observed in the data, we assume that firms differ by ownership structure and that family firms, though caring about profits, put relatively more weight on benefits of direct control than non-family firms. Managers differ in their degree of risk aversion and talent. The entry of firms and managers, the choice of managerial compensation schemes and the manager-firm matching are all endogenous. The model yields predictions on several equilibrium correlations that find support in our data: (i) Family firms use managerial contracts that are less sensitive to performance, both explicitly through bonus pay and implicitly through career development; (ii) More talented and risk-tolerant managers are matched with firms that offer steeper contracts. (iii) Managers who face steeper contracts work harder, earn more and display higher job satisfaction. Alternative explanations may account for some of these correlations but not for all of them jointly.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0901.

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Length: 51 pages
Date of creation: 2009
Date of revision: Feb 2009
Handle: RePEc:eie:wpaper:0901
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