Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking

Qi Liu and Bo Sun

American Economic Journal: Microeconomics, 2023, vol. 15, issue 2, 568-98

Abstract: This paper theoretically examines how relative wealth concerns affect equilibrium contracting and systemic risk-taking. We find that such externalities can generate pay for luck as an equilibrium strategy. In expectation of pay for luck in other firms, tying managerial pay to luck provides insurance to managers against a compensation shortfall relative to executive peers. We also show that an effort-inducing mechanism exists: managers have additional incentives to exert effort in utilizing investment opportunities, which helps them keep up with their peers during industry movements; however, pay for luck that is efficient within firms can nonetheless exacerbate aggregate fluctuations, especially during periods of heightened market risk.

JEL-codes: D81 D82 D86 G51 M12 M52 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmic:v:15:y:2023:i:2:p:568-98

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DOI: 10.1257/mic.20200325

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