CEO pay and the Lake Wobegon Effect

Rachel M. Hayes and Scott Schaefer

Journal of Financial Economics, 2009, vol. 94, issue 2, 280-290

Abstract: The "Lake Wobegon Effect," which is widely cited as a potential cause for rising CEO pay, is said to occur because no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO's pay package to lag market expectations. We develop a game-theoretic model of this Effect. In our model, a CEO's wage may serve as a signal of match surplus, and therefore affect the value of the firm. We compare equilibria of our model to a full-information case and derive conditions under which equilibrium wages are distorted upward.

Keywords: CEO; pay; Asymmetric; information; Signaling (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:94:y:2009:i:2:p:280-290

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