Executive Compensation and the Boundary of the Firm: The Case of Short-Lived Projects

Gorton, Gary B.; Grundy , Bruce D.

doi:10.2139/ssrn.81204

Abstract

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Executive Compensation and the Boundary of the Firm: The Case of Short-Lived Projects

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

University of Melbourne; Financial Research Network (FIRN)

Rodney L. White Center Working Paper No. 1-98

Abstract:
We consider the problem of moral hazard in the team of managers employed in a firm when the principal/firm owner can play an active role in determining team output. Unless the principal's compensation is non-decreasing in firm value there is an additional moral hazard problem since the principal will have an incentive to reduce output. In this context we determine team, and hence firm, size and solve for the form of optimal managerial compensation contracts. In particular we determine conditions under which optimal contracts will have option-like features.

Number of Pages in PDF File: 38

JEL Classification: D2, G3, J3

working papers series

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Date posted: May 1, 1998

Suggested Citation

Gorton, Gary B. and Grundy , Bruce D., Executive Compensation and the Boundary of the Firm: The Case of Short-Lived Projects. Rodney L. White Center Working Paper No. 1-98. Available at SSRN: http://ssrn.com/abstract=81204 or http://dx.doi.org/10.2139/ssrn.81204

Contact Information

Gary B. Gorton Yale School of Management ( email ) 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 United States 203 432-8931 (Fax) HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
Bruce D. Grundy (Contact Author) University of Melbourne ( email ) Faculty of Economics & Commerce Department of Finance Victoria, 3010 Australia +61 3 8344 9083 (Phone) +61 3 8344 6914 (Fax)
Financial Research Network (FIRN) C/- University of Queensland Business School St Lucia, 4071 Brisbane Queensland Australia HOME PAGE: http://www.firn.org.au

Abstract

Footnotes (14)

Executive Compensation and the Boundary of the Firm: The Case of Short-Lived Projects

Gary B. Gorton

Bruce D. Grundy

Date posted: May 1, 1998

Suggested Citation

Contact Information

Gary B. Gorton

Bruce D. Grundy (Contact Author)