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Equilibrium CEO contract with belief heterogeneity

Author

Listed:
  • Milo Bianchi

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Rose-Anne Dana

    (Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Elyès Jouini

    (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Consider a firm owned by shareholders with heterogeneous beliefs and run by a manager who chooses random production plans. Shareholders do not observe the chosen plan but only its realization. The financial market consists of assets contingent on production realizations. A contract for the manager specifies her compensation as a function of the firm's production and possibly some restrictions to trade in the financial market. Shareholders are unrestricted. We define a concept of equilibrium between the manager and shareholders such that the equilibrium production plan is unanimously preferred by the manager and the shareholders, markets clear and the manager has no incentive to cheat. We first analyze the properties of such equilibria and in particular show that the contract should restrict the manager from trading. We next provide a framework where such equilibria exist. We lastly study the properties of equilibrium compensations when shareholders have beliefs that can be ranked in terms of optimism towards the equilibrium plan. Specific attention is given to their departure from linear compensations.

Suggested Citation

  • Milo Bianchi & Rose-Anne Dana & Elyès Jouini, 2022. "Equilibrium CEO contract with belief heterogeneity," Post-Print halshs-03839944, HAL.
    • Handle: RePEc:hal:journl:halshs-03839944
    DOI: 10.1007/s00199-022-01440-6
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    References listed on IDEAS

    as
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    1. Jianjun Miao, 2022. "Introduction to the special issue in honor of Larry Epstein," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 329-333, September.

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    More about this item

    Keywords

    Heterogeneous beliefs; Asymmetric information; Manager-shareholders equilibrium;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General

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