CEO pay and the Lake Wobegon Effect
The "Lake Wobegon Effect," which is widely cited as a potential cause for rising CEO pay, is said to occur because no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO's pay package to lag market expectations. We develop a game-theoretic model of this Effect. In our model, a CEO's wage may serve as a signal of match surplus, and therefore affect the value of the firm. We compare equilibria of our model to a full-information case and derive conditions under which equilibrium wages are distorted upward.
Year of publication: |
2009
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Authors: | Hayes, Rachel M. ; Schaefer, Scott |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 94.2009, 2, p. 280-290
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Publisher: |
Elsevier |
Subject: | CEO pay Asymmetric information Signaling |
Saved in:
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