TY  - JOUR
AU  - Donaldson,John B.
AU  - Gershun,Natalia
AU  - Giannoni,Marc P.
TI  - Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15165
PY  - 2009
Y2  - July 2009
UR  - http://www.nber.org/papers/w15165
L1  - http://www.nber.org/papers/w15165.pdf
N1  - Author contact info:
John B. Donaldson
Columbia Business School
3022 Broadway, Uris Hall
New York, NY 10027-6902
Tel: 212/854-3401
E-Mail: jd34@columbia.edu

Natalia Gershun
Pace University
Lubin School of Business
1 Pace Plaza
New York, NY 10038.
E-Mail: ng65@columbia.edu

Marc Giannoni
Federal Reserve Bank of New York
Macroeconomic & Monetary Studies Function
Research and Statistics Group
33 Liberty Street
New York, NY 10045-0001
Tel: 212-720-6518
Fax: 212-720-1844
E-Mail: mg2190@columbia.edu
AB  - 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.
ER  -