Equilibrium CEO contract with belief heterogeneity

Milo Bianchi, Rose-Anne Dana () and Elyès Jouini ()
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Rose-Anne Dana: Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Elyès Jouini: PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2022-09
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Published in Economic Theory, 2022, 74 (2), pp.505-546. ⟨10.1007/s00199-022-01440-6⟩

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Journal Article: Equilibrium CEO contract with belief heterogeneity (2022)
Working Paper: Equilibrium CEO contract with belief heterogeneity (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03839944

DOI: 10.1007/s00199-022-01440-6

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