Some unpleasant general equilibrium implications of executive incentive compensation contracts

John B. Donaldson, Natalia Gershun and Marc Giannoni

Journal of Economic Theory, 2013, vol. 148, issue 1, 31-63

Abstract: We consider a simple real business cycle model in which shareholders hire self-interested executives to manage their firm. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firmʼs dividend, an increase in the firmʼs output results in a more than proportional increase in the managersʼ income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in managersʼ expectations. The proposed family of contracts may yield first-best outcomes for specific parameter choices.

Keywords: Delegation; Executive compensation; Indeterminacy and instability (search for similar items in EconPapers)
JEL-codes: E32 J33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:148:y:2013:i:1:p:31-63

DOI: 10.1016/j.jet.2012.09.007

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