Marcus Dittrich, Silvio Städter
Regulating Executive Pay: Incentive Contracts and Nonbinding Bonus Caps
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- 10.1628/jite-2020-0045
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This paper analyzes the effects of a regulatory cap on executive pay. We use a principal-agent model with moral hazard in which a firm and a manager bargain over an incentive contract, and we discuss the consequences of a nonbinding cap on bonus payments. We find that the bonus cap negatively affects the manager's effort choice and social welfare, even if the cap is introduced at a nonbinding level.