A Dynamic Model of Managerial Entrenchment and the Positive Incentives It Creates

36 Pages Posted: 5 Nov 2019

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: October 25, 2019

Abstract

This paper presents a model of entrenchment in which a CEO chooses how much effort to put into boosting the firm's productivity and the board and CEO bargain over executive-compensation and investment policies. The surplus that bargaining allocates derives from the reduction in value of the firm's capital that occurs if the CEO is replaced. Even if the CEO has no ownership stake, she exerts effort in order to increase the value of the capital at risk. This increases the shared surplus, which increases the CEO's current pay. Investment increases the surplus to be shared, increasing the CEO's future pay.

Keywords: corporate governance, entrenchment, executive compensation, Nash bargaining solution, ownership-based incentives

JEL Classification: C78, D25, G34, G35, M12

Suggested Citation

Guthrie, Graeme, A Dynamic Model of Managerial Entrenchment and the Positive Incentives It Creates (October 25, 2019). Available at SSRN: https://ssrn.com/abstract=3475272

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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