Industrial structure, executives' pay and myopic risk taking
This study outlines a new theory linking industrial structure to optimal employment contracts and value reducing risk taking. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remunera...
| Main Author: | |
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| Format: | Working paper |
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University of Oxford
2011
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| _version_ | 1797090564849532928 |
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| author | Thanassoulis, J |
| author_facet | Thanassoulis, J |
| author_sort | Thanassoulis, J |
| collection | OXFORD |
| description | This study outlines a new theory linking industrial structure to optimal employment contracts and value reducing risk taking. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remuneration introduces a myopic risk taking problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this some bonus pay is deferred. Convergence in size amongst the largest firms makes the cost of managing the myopic risk taking problem grow faster than the cost of managing the moral hazard problem. Eventually the optimal contract jumps from one achieving zero myopic risk taking to one tolerating the possibility of myopic risk taking. Under some conditions the industry partititions: the largest firms hire executives on contracts tolerant of myopic risk taking, smaller firms ensure myopia is ruled out. |
| first_indexed | 2024-03-07T03:20:27Z |
| format | Working paper |
| id | oxford-uuid:b73d69e3-7f5d-44e8-b951-1cd65da7bb79 |
| institution | University of Oxford |
| last_indexed | 2024-03-07T03:20:27Z |
| publishDate | 2011 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:b73d69e3-7f5d-44e8-b951-1cd65da7bb792022-03-27T04:47:05ZIndustrial structure, executives' pay and myopic risk takingWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:b73d69e3-7f5d-44e8-b951-1cd65da7bb79Bulk import via SwordSymplectic ElementsUniversity of Oxford2011Thanassoulis, JThis study outlines a new theory linking industrial structure to optimal employment contracts and value reducing risk taking. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remuneration introduces a myopic risk taking problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this some bonus pay is deferred. Convergence in size amongst the largest firms makes the cost of managing the myopic risk taking problem grow faster than the cost of managing the moral hazard problem. Eventually the optimal contract jumps from one achieving zero myopic risk taking to one tolerating the possibility of myopic risk taking. Under some conditions the industry partititions: the largest firms hire executives on contracts tolerant of myopic risk taking, smaller firms ensure myopia is ruled out. |
| spellingShingle | Thanassoulis, J Industrial structure, executives' pay and myopic risk taking |
| title | Industrial structure, executives' pay and myopic risk taking |
| title_full | Industrial structure, executives' pay and myopic risk taking |
| title_fullStr | Industrial structure, executives' pay and myopic risk taking |
| title_full_unstemmed | Industrial structure, executives' pay and myopic risk taking |
| title_short | Industrial structure, executives' pay and myopic risk taking |
| title_sort | industrial structure executives pay and myopic risk taking |
| work_keys_str_mv | AT thanassoulisj industrialstructureexecutivespayandmyopicrisktaking |