A recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics. Top incomes represent a small share of the population but a very significant share of total income and total taxes paid. Hence, aggregate economic growth per capita and Gini inequality indexes are sensitive to excluding or including top incomes. We discuss the estimation methods and issues that arise when constructing top income share series, including income definition and comparability over time and across countries, tax avoidance, and tax evasion. We provide a summary of the key empirical findings. Most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks. Top income shares do not recover in the immediate postwar decades. However, over the last thirty years, top income shares have increased substantially in English speaking countries and in India and China but not in continental European countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past. Finally, we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open. (JEL D31, D63, H26, N30) 1.

This paper presents summary statistics on the occupations of taxpayers in the top percentile of the national income distribution and fractiles thereof, as well as the patterns of real income growth between 1979 and 2005 for top earners in each occupation, based on information reported on U.S. individual income tax returns. The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005. During 1979‐2005 there was substantial heterogeneity in growth rates of income for top earners across occupations, and significant divergence in incomes within occupations among people in the top 1 percent. We consider the implications for various competing explanations for the substantial changes in income inequality that have occurred in the U.S. in recent times. We then use panel data on U.S. tax returns spanning the years 1987 through 2005, to estimate the elasticity of gross income with respect to net‐of‐tax share (that is, one minus the marginal tax rate). Information on occupation allows us to control for

Organization capital is a production factor that is embodied in the firm’s key talent and has an efficiency that is firm specific. As a result, both shareholders and management have a claim on the cash flows accruing from organization capital. Because the division of rents between shareholders and key talent can systematically vary over time, shareholders investing in organization capital are exposed to additional risks. In our model, key talent can transfer a fraction of the firm’s organization capital to a new enterprise, and the benefits of this reallocation vary systematically. This outside option determines the division of cash flows from organization capital between shareholders and key talent, and renders firms with high organization capital riskier. We construct a measure of organization capital based on readily available accounting data and find that firms with more organization capital relative to their industry peers outperform firms with less organization capital by 4.7 % per year. This dispersion in risk premia is

This paper conducts a comprehensive study of the optimal exercise policy for an executive stock option and its implications for option cost, average life, and alternative valuation concepts. The paper is the first to provide analytical results for an executive with general concave utility. Wealthier or less risk-averse executives exercise later and create greater option cost. However, option cost can decline with volatility. We show when there exists a single exercise boundary, yet demonstrate the possibility of a split continuation region. We also show that, for CRRA utility, the option cost does not converge to the Black-Scholes value as the correlation between the stock and the market portfolio converges to one. We compare our model’s option cost with the modified Black-Scholes approximation typically used in practice, and show that the

This paper, which serves as an introduction to the special issue on corporate governance of the Review of Financial Studies, reviews and comments on the state of corporate governance research. The special issue features seven papers on corporate governance that were presented in a meeting of the National Bureau of Economic Research’s (NBER’s) corporate governance project. Each of the papers represents state-of-the-art research in an important area of corporate governance research. For each of these areas, we discuss the importance of the area and the questions it focuses on, how the paper in the special issue makes a significant contribution to this area, and what we do and do not know about the area. We discuss in turn work on shareholders and shareholder activism, directors, executives and their compensation, controlling shareholders, comparative corporate governance, cross-border investments in global capital markets, and the political economy of corporate governance.

This paper examines how early career experiences affect the career path and promotion of managers as well as the managerial style that they develop when becoming CEOs. We identify the impact of an exogenous shock to managers ’ careers, in particular the business cycle at the career starting date. Economic conditions at the beginning of a manager’s career have lasting effects on the career path and the ultimate outcome as a CEO. CEOs who start in recessions take less time to become CEOs, but end up as CEOs in smaller firms, receive lower compensation, and are more likely to rise through the ranks within a given firm rather than moving across firms and industries. Moreover, managers who start in recessions have more conservative management styles once they become CEOs. These managers spend less in capital expenditures and R&D, have lower leverage, are more diversified across segments, and show more concerns about cost effectiveness. While looking at the role of early job choices on CEO careers is more endogenous, the results support the idea that certain types of starting positions are feeders for successful longrun management careers: Starting in a firm that ranks within the top ten firms from which CEOs come from is associated with favorable outcomes for a manager – they become CEOs in larger

Unregulated U.S. corporations dramatically increased their debt usage over the past century. Aggregate leverage – low and stable before 1945 – more than tripled between 1945 and 1970 from 11 % to 35%, eventually reaching 47 % by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes. Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role. Despite this increase

The debate over the extent and causes of rising inequality of American incomes and wages had raged for almost two decades even before the groundbreaking work of Piketty and Saez (2003) exploded onto the scene. This work reinforced the startling degree to which income growth had been concentrated overwhelmingly at the very top. The P&S data indicate, for instance, that between 1979 and 2007, the top 1 percent of American tax units accounted for 59.8 percent of average growth in cash, market-based incomes, compared to just 9 percent of average growth in this period accounted for by the bottom 90 percent. While including transfers and non-cash incomes reduces the share of growth received by the top 1 percent significantly, they still account for 38.3 percent of growth, more than the 31.0 percent share received by the bottom 80 percent1. In this article we will argue the following. First, this increase in the incomes and wages of the top 1 percent over in the last three decades should largely be interpreted as a redistribution of economic rents, and not simply as the outcome of well-functioning competitive markets rewarding skills or productivity based on marginal differences. Second, this rise in incomes at the very top has been the primary impediment to living standards growth for low and

Abstract New Delaware caselaw in the mid-1990s increased Delaware-incorporated firms' ability to resist hostile takeovers. In response, Delaware firms where managers had the greatest protection from outside shareholders substantially increased CEO compensation. Non-Delaware firms not directly impacted by the laws increased CEO compensation when the laws directly affected a substantial number of firms in their industry. Our results support a limited version of the contagion effect hypothesized by

We study a competitive model in which managers differ in ability and choose unobservable effort. Each firm chooses its size, how able a manager is to hire, and managerial compensa-tion. The model can be considered an amalgam of agency and Superstars, where optimizing incentives enhances the firm’s ability to provide a talented manager with greater resources. The model delivers many testable implications. Preliminary results show that the model is useful for understanding interesting compensation trends, for example, why CEO pay has recently become more closely associated with firm size. Allowing for firm productivity differences generally strengthens our results. (JEL G30, J21, J31, M12) Recent growth in CEO compensation, especially the astronomical pay of top CEOs (e.g., in 2006 Steve Jobs realized nearly $650 million from vested restricted stock1), has led many to question whether CEOs have too much in-fluence over their own compensation. The low pay for performance sensitivity in large firms (i.e., the inverse relation between CEO incentive compensation and firm size) has been used as evidence of CEO entrenchment (Bebchuk and Fried 2003, 2004). More important, empirically, the degree to which variation