Premium
A principal–agent analysis of pension policy
Author(s) -
McMillan Henry
Publication year - 1987
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090080408
Subject(s) - pension , shareholder , principal (computer security) , welfare , compensation (psychology) , simple (philosophy) , economics , microeconomics , principal–agent problem , empirical research , actuarial science , business , finance , computer science , corporate governance , market economy , psychology , philosophy , epistemology , psychoanalysis , operating system
This paper presents a principal‐agent model of pension policy in a world with permanent pension plans and no taxes. Firm managers, as agents of stockholders, choose pension policy to maximize their own welfare. Stockholders, aware of this self‐interested behavior, select the optimal linear risk‐sharing compensation program to induce conformance of manager actions to stockholder intersts. The paper develops the optimal linear risk‐sharing compensation program and pension policy. The comparative static changes in pension policy for a simple case are found and compared to the empirical findings of other researchers. It is argued that the principal‐agent hypothesis provides an explanation for the heretofore unexplained empirical regularities of those studies.