Has Moral Hazard Become a More Important Factor in Managerial Compensation?
- (pp. 1740-69)
Abstract
We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels. First, conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Second, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms. (JEL D82, L25, M12, M52)Citation
Gayle, George-Levi, and Robert A. Miller. 2009. "Has Moral Hazard Become a More Important Factor in Managerial Compensation?" American Economic Review, 99 (5): 1740-69. DOI: 10.1257/aer.99.5.1740Additional Materials
JEL Classification
- D82 Asymmetric and Private Information
- L25 Firm Performance: Size, Diversification, and Scope
- M12 Personnel Management; Executive Compensation
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects