Donald J. Wright
"Managerial incentives and firm efficiency in the presence of competition for managers"
JEL codes: L2
Keywords: managerial incentives, efficiency
Abstract: In a moral hazard framework, where firms compete for managers with different degrees of risk aversion, it is shown that the firms that have the greater marginal benefit of effort implement payment schmes which induce greater manager effort and less x-inefficiency. Part of this greater effort arises from a manager-selection effect. In equilibrium, competition between firms for managers induces ess risk averse managers to work for the firms with the greater marginal benefit of effort. Unlike previously identified effects in the literature, the manager-selection effect unambiguously increases internal firm efficiency.