Moral Hazard, Compensation and Talent Misallocation in the Market for CEOS

Abstract

I develop a structural model to quantify the efficiency loss arising from both the risk sharing and talent misallocation due to moral hazard in the market for CEOs. I propose a new approach to identify and estimate firms' production, CEOs' preferences and their productive type distributions from the data on firms' market value, financial returns and CEOs' compensation. Using these estimated model primitives, I conduct counterfactuals to show that the talent misallocation leads to a loss up to 1.6 billion dollars for the 1000 largest U.S. firms in 2011. This amount is almost three times as large as the loss arising from the risk-sharing inefficiency.