This article investigates managerial compensation and its incentive effects. Our econometric framework is derived from a multiperiod principal-agent model with moral hazard. Longitudinal data on returns to firms and managerial compensation are used to estimate the model. We find that firms would...

This article provides evidence that managers have private information they exploit for financial gain at the expense of shareholders. It develops a model of optimal contracting to show that moral hazard, hidden actions taken by agents, can rationalize why a principal would optimally induce...