Equilibrium CEO contract with belief heterogeneity

Milo Bianchi, Rose-Anne Dana () and Elyès Jouini ()
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Rose-Anne Dana: Université Paris-Dauphine, Université PSL, CNRS
Elyès Jouini: Université Paris-Dauphine, Université PSL, CNRS

Economic Theory, 2022, vol. 74, issue 2, No 8, 505-546

Abstract: Abstract Consider a firm owned by shareholders with heterogeneous beliefs and run by a manager who chooses random production plans. Shareholders do not observe the chosen plan but only its realization. The financial market consists of assets contingent on production realizations. A contract for the manager specifies her compensation as a function of the firm’s production and possibly some restrictions to trade in the financial market. Shareholders are unrestricted. We define a concept of equilibrium between the manager and shareholders such that the equilibrium production plan is unanimously preferred by the manager and the shareholders, markets clear and the manager has no incentive to cheat. We first analyze the properties of such equilibria and in particular show that the contract should restrict the manager from trading. We next provide a framework where such equilibria exist. We lastly study the properties of equilibrium compensations when shareholders have beliefs that can be ranked in terms of optimism towards the equilibrium plan. Specific attention is given to their departure from linear compensations.

Keywords: Heterogeneous beliefs; Asymmetric information; Manager-shareholders equilibrium (search for similar items in EconPapers)
JEL-codes: D24 D51 D53 D70 G32 G34 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00199-022-01440-6

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