Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments July 8, 2023 erstellt
Beschreibung:
This paper explores the implications of alternative contracting arrangements in an industry comprised of firms of different sizes which are paired with managers with different talents and who exert effort that cannot be monitored by investors. Assuming a technology which exhibits strong complementarity of firm capital, management talent and management effort, it first characterises the compensation contract that emerges when shareholders take the lead in proposing contract terms to management. In a competitive sorting equilibrium incentive pay relative to total compensation tends to be higher in larger firms with more talented management. Furthermore firm value-added increases more than proportionately with firm size. Nonetheless, even in the largest firms value-added may fall far short of the first-best value that would hold if management effort were contractible. The analysis then is directed to the outcome when managers have the power to propose contract terms to investors. It is found that in this case firm value-added tends to be much greater than under shareholder value maximisation and in some cases can achieve first-best. The optimal contract in this framework can be interpreted as a management buy-out. It is shown than when this contract is infeasible because of management wealth constraints it may be possible to achieve first-best in a multi-period contract with deferred compensation and where control rights are transferred to management over time