Abstract
We study the matching problem between firms and CEOs, extending a popular version of the principal-agent model developed by Holmstrom and Milgrom (1987). In their model, the optimal pay-performance sensitivity decreases in firm risks and agent's risk aversion, and increases in agent's productivity. We show that a more productive CEO (agent) should manage a safer firm in the matching equilibrium because the effort level of such a CEO is more responsive to high pay-performance sensitivity. As a consequence, a more productive CEO and a safer firm, where pay-performance sensitivity is high, form a winning combination for circumventing the effort underprovision problem. We also find the counterintuitive result that a more risk averse CEO should run a riskier firm for reasonable parameter values. Finally, we examine if the data support the negative relation between CEO's productivity and firm risks predicted by the theory.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
