Despite decades of research on heuristics and biases, empirical evidence on the effect of large incentives – as present in relevant economic decisions – on cognitive biases is scant. This paper tests the effect of incentives on four widely documented biases: base rate neglect, anchoring,...

What determines CEO incentives? A confusion exists among both academics and practitioners about how to measure the strength of CEO incentives, and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. We show that while one measure of CEO...

A common view of CEO compensation is that there is essentially no correlation between firm performance and CEO pay. This calls into question an important component of effective corporate governance. This zero correlation' belief is based on the widely cited result that CEO wealth rises by only...

State guaranty funds are quasi-governmental agencies that provide insurance to policyholders against the risk of insurance company failure. But insurance provided by guaranty funds, like all insurance, creates moral hazard problems, especially for companies that are insolvent or near-insolvent....

It is widely believed that the stock-market oriented US financial system forces corporate managers to behave myopically relative to their Japanese counterparts, who operate in a bank-based system. We hypothesize that if US firms are more myopic than Japanese firms, then episodes of financial...

When a Property and Casualty (P&C) insurance company becomes insolvent, solvent insurance companies are forced to pay assessments (a form of taxation) to state guarantee funds ('solvency funds') in order to protect the policyholders of the failed companies. We produce estimates of the costs to...

Bank risk-based capital (RBC) standards require banks to hold differing amounts of capital for different classes of assets, based almost entirely on a credit risk criterion. The paper provides both a theoretical and empirical framework for evaluating such standards. A model outlining a pricing...

The past two decades have seen a dramatic increase in the equitybased pay of U.S. corporate executives, an increase that has been driven almost entirely by the explosion of stock option grants. When properly designed, equity-based pay can raise corporate productivity and shareholder value by...

The dominant form of equity pay in the U.S. will change dramatically when accounting rules are changed (most likely in 2005) to require companies to charge the cost of their stock option plans on their income statements. Many companies are already switching from stock options to other forms of...