Economics
Marcus Dittrich, Silvio Städter
Regulating Executive Pay: Incentive Contracts and Nonbinding Bonus Caps
Volume 177 (2021) / Issue 1,
pp. 81-96 (16)
Published 09.10.2020
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.