CESifo Economic Studies Advance Access originally published online on May 27, 2009
CESifo Economic Studies 2009 55(3-4):515-541; doi:10.1093/cesifo/ifp010
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Insider Information and Performance Pay
* Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA, USA. e-mail: ggayle{at}andrew.cmu.edu; ramiller{at}andrew.cmu.edu. We would like to thank seminar participants, at SOLE 2006, Econometric Society summer meetings 2006, Carnegie Mellon University, Cornell University, Duke University, University of Essex, Georgia State University, London School of Economics, University of Maryland, New York University, University of Pennsylvania, Princeton University, and the Venice Summer Institute Workshop on Executive Pay. A previous version of this article appears under the title ‘The Paradox of Insider Information and Moral Hazard’.
This article provides evidence that managers have private information they exploit for financial gain at the expense of shareholders. It develops a model of optimal contracting to show that moral hazard, hidden actions taken by agents, can rationalize why a principal would optimally induce agents to benefit from their private information. Estimates from a structural model shows that moral hazard is an important economic factor. This leads to the conclusion that, in practice, shareholders and managers might optimally agree upon an arrangement where managers systematically exploit their private information about the firm. (JEL codes: J3, K2, G3 and C5).
Key Words: Managerial compensation • moral hazard • private information • performance pay • insider trading • structural estimation
CiteULike 
Connotea 
Del.icio.us What's this?
This article has been cited by other articles:
|
|
 |
|
  F. Englmaier, G. Illing, and E. Sadka Introduction to the Symposium on Executive Pay CESifo Economic Studies, September 1, 2009; 55(3-4): 399 - 404. [Full Text] [PDF]
|
|