Equilibrium CEO Contract with Belief Heterogeneity

Consider a firm owned by shareholders with heterogeneous beliefs and run by a manager. Shareholders can trade contingent claims in a complete asset market. The manager is given a contract so that at equilibrium she chooses the plan preferred by shareholders. We show that the contract should restrict the manager from trading. Moreover, the marginal utility of manager's compensation should be proportional to that of the representative shareholder at equilibrium. An implication is that, relative to a linear compensation, the manger should be induced to pay more attention to extreme output realizations