Managerial Compensation and the Cost of Moral Hazard

Mary M Margiotta and Robert A Miller

International Economic Review, 2000, vol. 41, issue 3, 669-719

Abstract: This article investigates managerial compensation and its incentive effects. Our econometric framework is derived from a multiperiod principal-agent model with moral hazard. Longitudinal data on returns to firms and managerial compensation are used to estimate the model. We find that firms would incur large losses from ignoring moral hazard, whereas managers only require moderate additional compensation for accepting a contract that ties their wealth to the value of the firm. Thus the costs of aligning hidden managerial actions to shareholder goals through the compensation schedule are much less than the benefits from the resulting managerial performance. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2000
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