@techreport{NBERw15165,
 title = "Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts",
 author = "John B. Donaldson and Natalia Gershun and Marc P. Giannoni",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "15165",
 year = "2009",
 month = "July",
 URL = "http://www.nber.org/papers/w15165",
 abstract = {We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. Delegation gives rise to a generic conflict of interest mediated by a convex (option-like) compensation contract which is able to align the interests of managers and their shareholders. With such a compensation contract, a given increase in the firm's output generated by an additional unit of physical investment results in a more than proportional increase in the manager's income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager's expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result.},
}