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Agents With and Without Principals

Industrial Relations Section Working Paper No. 430

14 Pages Posted: 11 Sep 2000  

Marianne Bertrand

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Sendhil Mullainathan

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2000

Abstract

Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view.
An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves what they can. The only constraints they face may be the availability of funds or more general fears, such as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view as the skimming view. In this paper, we investigate the relevance of these two views.

JEL Classification: J31, J33

Suggested Citation

Bertrand, Marianne and Mullainathan, Sendhil, Agents With and Without Principals (February 2000). Industrial Relations Section Working Paper No. 430. Available at SSRN: https://ssrn.com/abstract=223592 or http://dx.doi.org/10.2139/ssrn.223592

Marianne Bertrand (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
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773-834-5943 (Phone)

HOME PAGE: http://gsbwww.uchicago.edu/fac/marianne.bertrand/vita/cv_0604.pdf

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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Sendhil Mullainathan

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-2720 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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617-588-1473 (Phone)
617-876-2742 (Fax)

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