Agency Frictions, Managerial Compensation, and Disruptive Innovations

100 Pages Posted: 2 Feb 2019 Last revised: 11 Nov 2019

See all articles by Murat Alp Celik

Murat Alp Celik

University of Toronto - Department of Economics

Xu Tian

University of Toronto

Date Written: November 8, 2019

Abstract

Whether a manager leads the innovation efforts of a firm in line with shareholder preferences is key for firm value and growth. Motivated by empirical results suggesting corporate governance influences innovation mainly through executive compensation, we develop and estimate a new dynamic general equilibrium model of innovation with agency frictions and endogenous executive contracts. Removing agency frictions leads to contracts richer in stock options, boosting innovation by 27%, growth by 0.51pp, and welfare by 7.3%. These findings are robust to incorporating short-termism. Short-termism itself is also detrimental, the removal of which increases welfare by 1.5%. Removing both yields amplified gains.

Keywords: agency frictions, corporate governance, innovation, managerial compensation, short-termism

JEL Classification: E20, G30, O40

Suggested Citation

Celik, Murat Alp and Tian, Xu, Agency Frictions, Managerial Compensation, and Disruptive Innovations (November 8, 2019). Available at SSRN: https://ssrn.com/abstract=3319148 or http://dx.doi.org/10.2139/ssrn.3319148

Murat Alp Celik (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George St.
Toronto, ON M5S 3G7
Canada

HOME PAGE: http://muratcelik.faculty.economics.utoronto.ca/

Xu Tian

University of Toronto ( email )

150 St George Street
Toronto, Ontario M5S 3G7
Canada
647-606-0709 (Phone)

HOME PAGE: http://www.xutianur.com

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