Download This PaperRelative Wealth Concerns, Executive Compensation, and Risk Taking
40 Pages Posted: 14 Mar 2012 Last revised: 25 Feb 2017
Date Written: October 6, 2014
Abstract
We present a general-equilibrium theory of contracting in which managers are concerned about their social standing in a closely interacted circle of executives. Managerial effort in scrutinizing and implementing investment opportunities, which expose firm value to aggregate risk, can help them catch up with executive peers' pay during industry fluctuations. Excessive systemic risk-taking with pay for luck emerges in equilibrium. We also discuss a number of testable implications for compensation arrangements and risk taking in the cross section.
Keywords: relative wealth concerns, executive compensation
JEL Classification: G30, J33
Suggested Citation: Suggested Citation
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