Has Moral Hazard Become a More Important Factor in Managerial Compensation?
George-Levi Gayle, Robert A. Miller
American Economic Review · 2009 · Volume 99 · Issue 5
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)
Keywords
Asymmetric and Private Information, Firm Performance: Size, Diversification, and Scope, Personnel Management, Executive Compensation, Personnel Economics: Compensation and Compensation Methods and Their Effects
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