Working Paper: NBER ID: w16691
Authors: Oriana Bandiera; Andrea Prat; Luigi Guiso; Raffaella Sadun
Abstract: We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.
Keywords: manager characteristics; firm performance; incentives; risk aversion; talent
JEL Codes: J24; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Manager talent and risk aversion (D81) | Likelihood of being attracted to firms offering steeper incentive contracts (L14) |
| Steeper contracts (D86) | Manager effort (M10) |
| Steeper contracts (D86) | Fixed and variable pay (J33) |
| Family-owned firms (J54) | Flatter compensation schemes (J33) |
| Flatter compensation schemes (J33) | Likelihood of offering performance-sensitive contracts (J41) |
| High-powered incentives (M52) | Productivity, profits, and returns on capital (O49) |