When to Fire a CEO: Optimal Termination in Dynamic Contracts
Existing models of dynamic contracts impose that it is both optimal and feasible for the contracting parties to bind themselves together forever. This paper introduces optimal terminatin in dynamic contracts. We modify the standard dynamic agency model to include an external labor market which, upon the dissolution of the contract, allows the firm to return to the labor market to seek a new match. Under this simple closure of the model, two types of terminations emerge. Under one scenario, the agent is fired after a sequence of bad outputs and she becomes too poor to be punished effectively. Under the second scenario, the agent is forced out after a sequence of good outputs and she becomes too expensive to motivate. We then use the model to study issues of CEO termination and firm dynamics.
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|Date of creation:||01 Jan 2005|
|Date of revision:|
|Publication status:||Published in Journal of Economic Theory 2005, vol. 120, pp. 239-256|
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- Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
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Staff General Research Papers
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- Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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