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Why Has CEO Pay Increased so Much?Xavier GabaixNew York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Augustin LandierToulouse School of Economics July 2006 NYU Working Paper No. CLB-06-011 Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have differenttalents and are matched to firms in a competitive assignment model. In market equilib-rium, a CEO s pay changes one for one with aggregate firm size, while changing muchless 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 six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-foldincrease in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, whichnonetheless justifies large pay differences.The data broadly support the model. The size of large firms explains many of the pat-terns in CEO pay, across firms, over time, andbetween countries. (JEL D2, D3, G34,J3).
Number of Pages in PDF File: 47 Keywords: Executive compensation, wage distribution, corporate governance, Roberts law, Zipf s law, scaling, extreme value theory, superstars, calibratable corporate finance working papers seriesDate posted: October 31, 2008Suggested CitationContact Information
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