Relative Wealth Concerns, Executive Compensation, and Risk Taking

40 Pages Posted: 14 Mar 2012 Last revised: 25 Feb 2017

See all articles by Qi Liu

Qi Liu

Peking University - Department of Finance

Bo Sun

University of Virginia Darden School of Business

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

Liu, Qi and Sun, Bo, Relative Wealth Concerns, Executive Compensation, and Risk Taking (October 6, 2014). Available at SSRN: https://ssrn.com/abstract=2018851 or http://dx.doi.org/10.2139/ssrn.2018851

Qi Liu (Contact Author)

Peking University - Department of Finance ( email )

Beijing
China

Bo Sun

University of Virginia Darden School of Business ( email )

100 Darden Blvd
K, VA 22903
United States
8622453813 (Phone)

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