On the Efficiency of Markets for Managers
10 Pages Posted: 13 Nov 2000
Date Written: Undated
This paper examines the efficiency of the outside labor market in inducing optimal managerial behavior in the presence of learning. It shows that the incentives provided by the market can be more efficient than the original analysis of Holmstrom (1982) would suggest. Moreover, under a mild additional assumption the existence of an epsilon-efficient equilibrium can be guaranteed if the manager is patient. This supports Fama's (1980) original idea that the outside labor market can be efficient in disciplining top managers. These results also suggest that the empirically documented low levels of explicit incentives for managers might be due to the presence of implicit incentives provided by the outside market.
JEL Classification: C72, D83, J30
Suggested Citation: Suggested Citation