Employee Stock Options
An entrepreneur with information about firm quality seeks financing from an uninformed investor in order to pay a worker. I show that if the worker, too, knows the true quality of the firm, then certain long term wage agreements can credibly signal firm quality. Such wage agreements have a low initial wage and are equity-like in the sense that future pay is tied to firm performance, because only a worker in a good quality firm would be willing to defer compensation to an uncertain future, getting paid only if the firm succeeds. Moreover, in an important pooling equilibrium, all firms use equity-like wage contracts. The model provides an economic rationale for the use of stock options among regular, non-executive employees, in particular in small, knowledge intensive firms (such as in the ”new economy”) where workers are more likely to have information about the true quality of the firm.
|Date of creation:||03 Jan 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway|
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Web page: http://www.oekonomi.uio.no/indexe.html
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References listed on IDEAS
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- Wilson, Robert, 1985. "Multi-dimensional signalling," Economics Letters, Elsevier, vol. 19(1), pages 17-21.
- Oyer, Paul & Schaefer, Scott, 2005.
"Why do some firms give stock options to all employees?: An empirical examination of alternative theories,"
Journal of Financial Economics,
Elsevier, vol. 76(1), pages 99-133, April.
- Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
- Paul Oyer & Scott Schaefer, 2004. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," NBER Working Papers 10222, National Bureau of Economic Research, Inc.
- Quinzii, Martine & Rochet, Jean-Charles, 1985. "Multidimensional signalling," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 261-284, June.
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