Date of Original Version

12-2009

Type

Article

Abstract or Description

We estimate a principal-agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compensation. We find exogenous growth in firm size largely explains these secular trends in compensation. In our framework, exogenous firm size works through two channels: Conflicts of interest between shareholders and managers are magnified in large firms, so optimal compensation plans are now more closely linked to insider wealth. Also, the market for managers has become more differentiated, increasing the premium paid to managers of large versus small firms.

DOI

10.1257/aer.99.5.1740

Comments

Copyright © 2009 by the American Economic Association. Technical Appendix: http://www.andrew.cmu.edu/user/ggayle/technical_appendixmoral1.pdf

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Published In

American Economic Review, 99, 5, 1740-1769.