English, Article, Journal or magazine article edition: Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts John B. Donaldson; Natalia Gershun; Marc P. Giannoni

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts
Author
  • John B. Donaldson
  • Natalia Gershun
  • Marc P. Giannoni
Physical Description
  • preprint
Notes
  • We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. Delegation gives rise to a generic conflict of interest mediated by a convex (option-like) compensation contract which is able to align the interests of managers and their shareholders. With such a compensation contract, a given increase in the firm's output generated by an additional unit of physical investment results in a more than proportional increase in the manager's income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager's expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result.
  • RePEc:nbr:nberwo:15165
Language
  • English
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