Work Ethic, Employment Contracts, and Firm Value
Bruce I. Carlin
University of California, Los Angeles (UCLA) - Anderson School of Management
Duke University - Fuqua School of Business
Journal of Finance, Forthcoming
We analyze how the work ethic of managers impacts a firm's employment contracts, riskiness, growth potential, and organizational structure. Flat contracts are optimal for diligent managers because they reduce risk-sharing costs, but they attract egoistic agents who shirk and unskilled agents who add no value. Stable, bureaucratic firms with low growth potential are more likely to gain value from managerial diligence. Firms that hire from a virtuous pool of agents are more conservative in their investments and have a horizontal corporate structure. Our theory also yields several testable implications that distinguish it from standard agency models.
Number of Pages in PDF File: 48
Keywords: agency theory, compensation contracts, ethics, virtue, incentives, firm structure, labor market
JEL Classification: G30, J30, M14, J41, L23, D21, D69working papers series
Date posted: August 26, 2007 ; Last revised: May 18, 2008
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