Working Paper: CEPR ID: DP9147
Authors: Ronald W. Anderson; Maria Cecilia Bustamante; Stphane Guibaud
Abstract: We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention.
Keywords: agency; compensation policy; firm growth; managerial turnover; optimal contracting; severance pay
JEL Codes: G30; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth opportunities (O36) | managerial turnover (M51) |
| performance (D29) | managerial turnover (M51) |
| growth opportunities (O36) | compensation structures (M52) |
| managerial turnover (M51) | performance (D29) |
| performance (D29) | growth opportunities (O36) |
| current dismissal policies (J63) | future managerial contracts (L14) |