BU Law School
NBER Working Papers and Publications
|July 2002||Managerial Power and Rent Extraction in the Design of Executive Compensation|
with Lucian Arye Bebchuk, Jesse M. Fried: w9068
This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic re-search on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm's length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes tha...
Published: Bebchuk, Lucian Arye, Jesse Fried and David Walker. “Managerial Power and Rent Extraction in the Design of Executive Compensation." University of Chicago Law Review 69 (2002): 751-846.
|December 2001||Executive Compensation in America: Optimal Contracting or Extraction of Rents?|
with Lucian Arye Bebchuk, Jesse M. Fried: w8661
This paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders and, to camouflage the extraction of rents, executive compensation might be structured sub-optimally. The presence of rent extraction, we argue, is consis...
|January 2001||The Overlooked Corporate Finance Problems of a Microsoft Breakup|
with Lucian Arye Bebchuk: w8089
This paper identifies problems with the ordered breakup of Microsoft that seem to have been completely overlooked by the government, the judge, and the commentators. The breakup order prohibits Bill Gates and other large Microsoft shareholders from owning shares in both of the companies that would result from the separation. Given this prohibition, we show, dividing the securities in the resultant companies among the shareholders is not as straightforward as the government has suggested. Any method of distributing the securities that would comply with this mandate would either (i) impose a significant financial penalty on Microsoft's large shareholders that is not contemplated by the order, or (ii) create a risk of a substantial transfer of value between Microsoft's shareholders. In additi...
Published: "The Overlooked Corporate Finance Problems of a Microsoft Breakup" The Business Lawyer, Vol. 56, No. 2, pp. 459-481 (2001).