The Market for Managerial Labor Services and Capital Market Equilibrium

Tim S. Campbell and William A. Kracaw

Journal of Financial and Quantitative Analysis, 1985, vol. 20, issue 3, 277-297

Abstract: This paper presents a model of equilibrium in a capital market for linear shares of risky firms andin a market for managerial labor in which market participants function as both investors and managers. The model yields interesting and relevant equilibrium conditions that integrate earlier separate treatments of the capital market with human capital and the incentive contracting problem regarding shirking.The theory developed here provides a microeconomic explanation of how the price of risk established in the capital market is relevant to the labor contracting problem. The analysis also provides a logical rationale for the division of responsibilities between a board of directors and the management of the firm.

Date: 1985
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