Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking
- (pp. 568-98)
Abstract
This paper theoretically examines how relative wealth concerns affect equilibrium contracting and systemic risk-taking. We find that such externalities can generate pay for luck as an equilibrium strategy. In expectation of pay for luck in other firms, tying managerial pay to luck provides insurance to managers against a compensation shortfall relative to executive peers. We also show that an effort-inducing mechanism exists: managers have additional incentives to exert effort in utilizing investment opportunities, which helps them keep up with their peers during industry movements; however, pay for luck that is efficient within firms can nonetheless exacerbate aggregate fluctuations, especially during periods of heightened market risk.Citation
Liu, Qi, and Bo Sun. 2023. "Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking." American Economic Journal: Microeconomics, 15 (2): 568-98. DOI: 10.1257/mic.20200325Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- M12 Personnel Management; Executives; Executive Compensation
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
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