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Golden parachutes: Credible commitments or evidence of shirking?

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  • Dino Falaschetti

Abstract

External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.

Suggested Citation

  • Dino Falaschetti, 2003. "Golden parachutes: Credible commitments or evidence of shirking?," Microeconomics 0311004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0311004
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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