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Optimal Managerial Remuneration and Firm-level Diversification

Erlend Nier

FMG Discussion Papers from Financial Markets Group

Abstract: In a model that involves both moral hazard and hidden information on the part of the manger different remuneration schemes are discussed and the optimal contract between financial investor and manager is derived. Assuming the manager is risk-neutral and protected by limited liability, a benefit from diversification is shown to exist even though the projects which the manager develops are technologically unrelated and choices made on one project do not constrain the choices on any other project.

Date: 1997-07
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