The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating

Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside sha...

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Main Author: GUHA, Brishti
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Language:English
Published: Institutional Knowledge at Singapore Management University 2005
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Online Access:https://ink.library.smu.edu.sg/soe_research/859
https://ink.library.smu.edu.sg/context/soe_research/article/1858/viewcontent/errantexecutive.pdf
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spelling sg-smu-ink.soe_research-18582019-05-04T09:37:32Z The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating GUHA, Brishti Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside shareholders, attempts to control the manager through compensation contracts and dismissal threats Since compensation determines the manager’s incentive to cheat, firms competing for outside capital publicly announce their managerial contracts. However, secret renegotiation between firm and manager is still possible: so outsiders guard against being cheated by limiting their total stake in any firm. This imposes a credibility constraint on firm size, providing a rationale for the shape of long-run cost curves. Given this limit on outside funds, the minimum size requirement for enterprises to become operational and the ability to pay managers enough to ensure honesty both set a floor to the personal wealth required to enter entrepreneurship. Thus, we endogenize entry into industry, establish a unique equilibrium for any distribution of wealth, and characterize different equilibria. We also explain features of poor countries like dominance of family firms, moral hazard induced vicious circles that retard industrialization and the stimulus that inequality may provide to industrial development. 2005-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/859 https://ink.library.smu.edu.sg/context/soe_research/article/1858/viewcontent/errantexecutive.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Moral hazard firm size managerial compensation repeated games Behavioral Economics Economics
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Moral hazard
firm size
managerial compensation
repeated games
Behavioral Economics
Economics
spellingShingle Moral hazard
firm size
managerial compensation
repeated games
Behavioral Economics
Economics
GUHA, Brishti
The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
description Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside shareholders, attempts to control the manager through compensation contracts and dismissal threats Since compensation determines the manager’s incentive to cheat, firms competing for outside capital publicly announce their managerial contracts. However, secret renegotiation between firm and manager is still possible: so outsiders guard against being cheated by limiting their total stake in any firm. This imposes a credibility constraint on firm size, providing a rationale for the shape of long-run cost curves. Given this limit on outside funds, the minimum size requirement for enterprises to become operational and the ability to pay managers enough to ensure honesty both set a floor to the personal wealth required to enter entrepreneurship. Thus, we endogenize entry into industry, establish a unique equilibrium for any distribution of wealth, and characterize different equilibria. We also explain features of poor countries like dominance of family firms, moral hazard induced vicious circles that retard industrialization and the stimulus that inequality may provide to industrial development.
format text
author GUHA, Brishti
author_facet GUHA, Brishti
author_sort GUHA, Brishti
title The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
title_short The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
title_full The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
title_fullStr The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
title_full_unstemmed The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating
title_sort case of the errant executive: management, control and firm size in corporate cheating
publisher Institutional Knowledge at Singapore Management University
publishDate 2005
url https://ink.library.smu.edu.sg/soe_research/859
https://ink.library.smu.edu.sg/context/soe_research/article/1858/viewcontent/errantexecutive.pdf
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