Competition for Talent under Performance Manipulation

Paul Povel Ivan Marinovic - Jul 08, 2018

We study the effects of introducing competition for CEOs, assuming that the talent of
CEOs is not observable and that they can misreport their performance. Without competition
for talent, firms maximize their profits by offering inefficiently low-powered
incentive contracts. Competition for talent removes those inefficiencies, but it leads
to excessively high-powered incentive contracts, causing efficiency losses that can be
more severe than the inefficiencies that competition mitigates. If misreporting is not a
concern, however, then competition for talent has unambiguously positive effects on
efficiency.

Published:Journal of Accounting and Economics,2017,64(1),1-14

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