Managerial Turnover and Entrenchment

Zenan Wu () and Xi Weng
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Zenan Wu: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We consider a two-period model in which the success of the firm depends on the effort of a first-period manager (the incumbent) and the ability of a second-period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. We show that the information technology the board has to assess the incumbent manager's ability is an important determinant of the optimal contract and replacement policy. The contract must balance providing incentives for the incumbent manager to exert effort and ensuring that the second-period manager is of high ability. We show that severance pay in the contract serves as a costly commitment device to induce effort. Unlike existing models, we identify conditions on the information structure under which both entrenchment and anti-entrenchment emerge in the optimal contract.

Keywords: entrenchment; managerial turnover; contracting; information order (search for similar items in EconPapers)
JEL-codes: D86 J33 M52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-03-18
New Economics Papers: this item is included in nep-mic
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Journal Article: Managerial turnover and entrenchment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:15-016

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