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Matching Firms, Managers, and Incentives

  • Oriana Bandiera

    (London School of Economics)

  • Luigi Guiso

    (European University Institute)

  • Andrea Prat

    (London School of Economics)

  • Raffaella Sadun

    ()

    (Harvard Business School, Strategy Unit
    London School of Economics - Centre for Economic Performance)

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.

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File URL: http://www.hbs.edu/research/pdf/10-073.pdf
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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-073.

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Length: 59 pages
Date of creation: Feb 2010
Date of revision: Aug 2011
Handle: RePEc:hbs:wpaper:10-073
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