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Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion

  • Pierre Chaigneau

    ()

It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if CRRA preferences are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp693.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp693.

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Date of creation: Oct 2011
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Handle: RePEc:fmg:fmgdps:dp693
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