Compensation and Agency
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Felipe Varas, Duke University
Compensation, Moral Hazard, and Talent Misallocation in the Market for CEOs
AbstractThis paper develops a structural model to quantify the efficiency loss arising from both
risk sharing and talent misallocation due to the presence of moral hazard in the market
for CEOs. I estimate the model parameters characterizing CEOs' preferences, firm'
technologies, and their productive type distributions (firms' size and CEOs' talent)
from the data on firms' market value, financial returns and CEO compensation. The
estimation results show that more leveraged firms and/or firms with more assets tend
to end up with less-talented CEOs. By using the estimates of model parameters, I
conduct counterfactuals to show that the talent misallocation led to a loss up to USD
1.6 billion dollars for the 1000 largest US firms in 2011. This amount is almost three
times the loss arising from the risk-sharing inefficiency.
Contract Horizon and Turnover
AbstractThis paper develops a model in which a principal hires agents whose fit with the firm changes over time. Agents are better informed about such changes, so the principal must decide how to elicit information that could lead to an agent's dismissal. The paper rationalizes the use of renewable fixed-term contracts as a mechanism that periodically switches from relying on severance pay to relying on firm performance on renewal dates to sort out agents. The paper's key implications focus on the determinants of contract horizon. Furthermore, it sheds light on several puzzling stylized facts concerning hiring and replacement practices.
- G3 - Corporate Finance and Governance