Managerial Compensation and the Cost of Moral Hazard

International Economic Review, Vol. 41, Issue 3, August 2000

Posted: 20 Jul 2001

See all articles by Mary M. Margiotta

Mary M. Margiotta

University of Nebraska at Kearney

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business

Abstract

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.

Suggested Citation

Margiotta, Mary M. and Miller, Robert A., Managerial Compensation and the Cost of Moral Hazard. International Economic Review, Vol. 41, Issue 3, August 2000, Available at SSRN: https://ssrn.com/abstract=241840

Mary M. Margiotta (Contact Author)

University of Nebraska at Kearney

Kearney, NE 68849
United States

Robert A. Miller

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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