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Managerial Compensation and the Cost of Moral Hazard
Author(s) -
Margiotta Mary M.,
Miller Robert A.
Publication year - 2000
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00080
Subject(s) - moral hazard , compensation (psychology) , incentive , shareholder , enterprise value , microeconomics , principal (computer security) , value (mathematics) , principal–agent problem , actuarial science , business , shareholder value , economics , finance , corporate governance , computer science , psychology , machine learning , psychoanalysis , operating system
This article investigates managerial compensation and its incentive effects. Our econometric framework is derived from a multiperiod principal‐agent model with moral hazard. Longitudinal data on returns to firms and managerial compensation are used to estimate the model. We find that firms would incur large losses from ignoring moral hazard, whereas managers only require moderate additional compensation for accepting a contract that ties their wealth to the value of the firm. Thus the costs of aligning hidden managerial actions to shareholder goals through the compensation schedule are much less than the benefits from the resulting managerial performance.