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Cover of: Regulating Executive Pay: Incentive Contracts and Nonbinding Bonus Caps
Marcus Dittrich, Silvio Städter

Regulating Executive Pay: Incentive Contracts and Nonbinding Bonus Caps

Section: Articles
Volume 177 (2021) / Issue 1, pp. 81-96 (16)
Published 09.10.2020
DOI 10.1628/jite-2020-0045
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  • 10.1628/jite-2020-0045
Summary
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.