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Implicit Contracts, Managerial Incentives and Financial Structure

Author

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  • Roberta Dessí

Abstract

This paper examines how managers may be given appropriate incentives to (a) provide effort, and (b) implement efficient implicit contracts with workers. Under certain assumptions, this can be achieved by tying managerial compensation to shareholder value. However, if reputation effects are weak, it can be more efficient to adopt an incentive scheme in which the manager is replaced if performance falls below a critical level, and otherwise retains control, receiving a fixed reward. The required managerial replacement policy can be implemented through a financial structure combining ¶hard¶ debt with a relatively dispersed ownership structure.KeyWords: principal-agent, incentives, implicit contracts, debt.

Suggested Citation

  • Roberta Dessí, 1997. "Implicit Contracts, Managerial Incentives and Financial Structure," FMG Discussion Papers dp279, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp279
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    Cited by:

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    2. Calcagno, R. & Renneboog, L.D.R., 2004. "Capital Structure and Managerial Compensation : The Effects of Renumeration Seniority," Discussion Paper 2004-120, Tilburg University, Center for Economic Research.
    3. Hongyang He & Bin Zhang, 2022. "Effective Synergy of Market Agents: The Core of Achieving Multi-Agent Governance on the Internet Platform," Sustainability, MDPI, vol. 14(24), pages 1-20, December.
    4. Ruhnke, Carsten S., 2022. "Implications of the Creditors' Influence on Corporate Decisions," Junior Management Science (JUMS), Junior Management Science e. V., vol. 7(1), pages 150-184.
    5. Nier, Erlend, 1998. "Managers, debt and industry equilibrium," LSE Research Online Documents on Economics 119152, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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