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Implicit Contracts, Managerial Incentives, and Financial Structure

Roberta Dessi

Journal of Economics & Management Strategy, 2001, vol. 10, issue 3, 359-390

Abstract: This paper examines how managers may be given incentives to exert effort, and to implement efficient implicit contracts with workers. Under certain assumptions, this can be achieved by tying managerial compensation to shareholder value. However, if reputation effects are weak, it is more efficient to adopt an incentive scheme in which the manager is punished by outside investor intervention when performance falls below a critical level, and otherwise retains control, receiving a fixed reward. The required form of outside intervention can be implemented through a financial structure combining hard debt with a dispersed ownership structure. Copyright (c) 2001 Massachusetts Institute of Technology.

Date: 2001
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Working Paper: Implicit Contracts, Managerial Incentives and Financial Structure (1997) Downloads
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