Working Paper: NBER ID: w12365
Authors: Xavier Gabaix; Augustin Landier
Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO's pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.
Keywords: No keywords provided
JEL Codes: D2; D3; G34; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm size (L25) | CEO compensation (M12) |
| CEO's firm size (L25) | CEO compensation (M12) |
| average firm size in economy (L25) | CEO compensation (M12) |
| CEO talent (M12) | CEO compensation (M12) |
| market capitalization increase (1980-2003) (N12) | CEO pay increase (1980-2003) (M12) |