This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

Measured individual performance often depends on random factors which also affect the performances of other workers in the same firm, industry, or market. In these cases, relative performance evaluation (RPE) can provide incentives while partially insulating workers from the common uncertainty. Basing pay on relative performance, however, generates incentives to sabotage the measured performance of co-workers, to collude with co-workers and shirk, and to apply for jobs with inept co-workers. RPE contracts also are less desirable when the output of co-workers is expensive to measure or in the presence of production externalities, as in the case of team production. The purpose of this paper is to review the benefits and costs of RPE and to test for the presence of RPE in one occupation where the benefits plausibly exceed the costs: toplevel management. Rewarding chief executive officers (CEOs) based on performance measured relative to the industry or market creates incentives to take actions increasing shareholder wealth while insuring executives against the vagaries of the stock and product markets that are beyond their control. We expect RPE to be a common feature of

Much of the existing theory of incentives describes a static relationship that lasts for just one transaction. This static assumption is not only unrealistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work organizations can exploit, and interact with, the implicit incentives generated by the repeated interaction of hc agents. The-optimal incentive scheme is shown to display many observed features of the increasingly popular "teams," such as low-powered, group incentives, and the use of self monitoring and decentralization of authority among team members.

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We incorporate multiagent, principal-agent theory into general equilibrium analysis. The traded commodities are multiagent contracts that include a description of the individual’s job, effort level, and state-contingent consumption. These contracts are club goods. The competitive equilibrium and the Pareto program are formulated. The contracts are identified with firms, so the market determines which firms exist and who is assigned to which firm in what capacity. An example is provided in which the internal organization of firms and the distribution of firm classes vary with the aggregate capital endowment and its distribution across agents. A simplex-based algorithm for solving the Pareto program is developed. We would like to thank the referees, the editors, Bryan Ellickson, Lionel McKenzie, Suzanne Scotchmer, William Zame, and seminar participants from Alicante, Chicago,

The main purpose of this paper is to provide a critical overview of the recent empirical contributions that use cross-country data to study the effect of product market regulation and reform on a country’s macroeconomic performance. After a review of the theoretical literature and of relevant micro-econometric evidence, the paper discusses the main data and methodological issues related to empirical work on this topic. It then critically evaluates the cross-country evidence on the effect of product market regulation on markups, firm dynamics, investment, employment, innovation, productivity and output growth. A summary of what we learn from the econometric results concludes the paper.

This paper analyzes the conditions under which joint liability loans to encourage peer-monitoring would be offered and chosen ahead of monitored individual liability alternatives on a competitive loan market when production and monitoring activities are subject to moral hazard. In contrast to other analyses, the case for joint liability loans does not rest on an assumed monitoring or information advantage by borrowers but instead relies on a incentive diversification effect that cannot be replicated by outside intermediaries. Joint liability clauses are chosen to implement a preferred Nash equilibrium in a multi-agent, multi-tasking game, where borrowers must be given incentives to be diligent as financed entrepreneurs and as monitors of others. Potential side contracting or collusion amongst borrowers is shown to only harm credit access, even when borrowers enjoy a monitoring advantage relative to outsiders.

This paper proposes a theory of the optimal organization of expertise. We develop a Principle of Incentives for Expertise: an expert is rewarded if his recommendation is confirmed either by the facts or by other experts ’ recommendations. Building on this Principle, we show that agency costs of delegated expertise exhibit diseconomies of scale. Possible organizational responses to this problem include basing decisions on a less than optimal amount of information, and relying on multiple experts.

In this paper we address the issue of investors' asset allocation decisions when they delegate portfolio management to an agent. Contrary to predictions from traditional financial theory, it is found that investors may not induce their fund manager to allocate the funds to the asset with the highest return. Instead they may wish to induce trade in a particular asset, because another manager is trading in it and despite the presence of a more profitable alternative. Doing so allows investors to write an efficiency-improving relative-performance contract. On the other hand, herding leads principals to design wage contracts strategically, resulting in more aggressive and thus less profitable trade in equilibrium. We show that investors herd in their asset allocation decision, when managers are sufficiently risk averse or when the precision of their information is low. We also show that when principals can decide whether or not to disclose information about their manager's performance, the...

We study how the optimal contract in team production is affected when employees are averse to inequity in the sense described by Fehr and Schmidt (1999). By designing a reward scheme that creates inequity off the desired equilibrium, the employer can induce employees to perform effort at a lower total wage cost than when they are not inequity averse. We also show that the optimal output choice might change when employees are inequity averse. Finally, we show that an employer can gain, and never lose, by designing a contract that accounts for inequity aversion, even if employees have standard preferences.