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

Author

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  • Pierre Chaigneau

Abstract

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.

Suggested Citation

  • Pierre Chaigneau, 2011. "Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion," FMG Discussion Papers dp693, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp693
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    1. is not listed on IDEAS
    2. repec:oup:rfinst:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    3. Pierre Chaigneau, 2012. "The Effect of Risk Preferences on the Valuation and Incentives of Compensation Contracts," Cahiers de recherche 1209, CIRPEE.
    4. Ingolf Dittmann & Ko-Chia Yu & Dan Zhang, 2017. "How Important Are Risk-Taking Incentives in Executive Compensation?," Review of Finance, European Finance Association, vol. 21(5), pages 1805-1846.
    5. Tobias Huber & Johannes G. Jaspersen & Andreas Richter & Dennis Strümpel, 2023. "On the change of risk aversion in wealth: a field experiment in a closed economic system," Experimental Economics, Springer;Economic Science Association, vol. 26(1), pages 1-26, March.
    6. Dilip B. Madan & King Wang, 2024. "On the real rate of interest in a closed economy," Annals of Finance, Springer, vol. 20(4), pages 459-477, December.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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