The Dynamics of Bargaining Power in a Principal-Agent Model

Sonia Di Giannatale, Itza Tlaloc Quetzalcoatl Curiel-Cabral and Genaro Basulto
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Itza Tlaloc Quetzalcoatl Curiel-Cabral: Division of Economics, CIDE
Genaro Basulto: Tepper School of Business, Carnegie Mellon

No DTE 630, Working Papers from CIDE, División de Economía

Abstract: We propose a dynamic principal-agent model where the agent's initial bargaining power is the state variable and a law of motion that governs their bargaining power's behavior. Our numerical results indicate that agents with the same relative risk aversion might show dif- ferent paths of their bargaining powers, and that more powerful the incentives ensue higher variability in the agent's salary. We implement an empirical equation to identify CEOs' bar- gaining power and find a set of values of the state variable for which the proposed dynamics explains well the relationship between firm performance and CEO compensation. Finally, by analyzing a panel sample of annual observations for 9,084 CEOs in the U.S., we conclude that our estimates are consistent with empirical findings of a slow yearly growth in CEOs' compensation.

Keywords: Dynamic Analysis; Contract Theory; Executive Compensation (search for similar items in EconPapers)
JEL-codes: C61 D86 J33 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2023-01
New Economics Papers: this item is included in nep-cfn and nep-hrm
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