Competition for Talent and Cyclical Malpractice in Corporate Governance
61 Pages Posted: 25 Jun 2019
Date Written: June 19, 2019
I present a model to rationalize the pro-cyclical nature of executive compensation and malpractice. The model features a principal-agent setting where effort and misreporting incentives are at conflict, and investors compete for managerial talent. In equilibrium, governance standards decrease, and bonuses increase in the level of managerial talent. An increase in industry profitability, a reduction in the market rate of return, and an increase in top managerial talent increase aggregate output, malpractice, and incentive compensation. Extensions of the model generate endogenous episodes of "bonus cultures" based on short-term performance measures. Embedded into a dynamic general equilibrium with household savings and endogenous rates of return, the model reproduces the build-up of malpractice during booms and their reduction in worse states of the economy.
Keywords: Executives, Governance, Compensation, Malpractice, Cycles
JEL Classification: G34, G35, E32
Suggested Citation: Suggested Citation