John Garen

Executive Compensation and Principal-Agent Theory

The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants. In contrast, this paper analyzes a simple principal-agent model to determine how well it explains variations in CEO incentive pay and salaries. Many findings are consistent with the basic intuition of principal-agent models that compensation is structured to trade off incentives with insurance. However, statistical significance for some of the effects is weak, although the magnitudes are large. Also, there is little evidence of the use of relative performance pay. Nevertheless, while puzzles remain, it seems clear that principal-agent considerations play a role in setting executive compensation.

Compensating Wage Differentials and the Endogeneity of Job Riskiness

Those with greater earnings capacity are likely to choose safer jobs, assuming safety is a normal good. Those who e xperience greater returns to job may choose riskier jobs. This paper estimates wage premia for risk of fatality and injury, allowing unobs ervables to affect earnings capacity and the returns to risk. As the endogeneity of job risk causes bias in OLS estimation, the model is e stimated with simultaneous equations and modified selection bias tech niques. The results indicate that unobserved heterogeneity in the ret urns to risk is important and that OLS underestimates the wage premia for fatality and injury risk. Copyright 1988 by MIT Press.

Worker Heterogeneity, Job Screening, and Firm Size

A model of job screening is developed in which firms make wage offers to workers based on an imperfect evaluation of their abilities. If large firms have higher costs of acquiring information about workers, they screen workers with less accuracy and choose a wage compensation scheme different from the one small firms choose. This generates the often observed positive correlation between firm size and wages. The model also predicts that wage structure, and perhaps wage dispersion, will differ by firm size and that individuals who acquire more schooling will also choose to work in a larger firm. These hypotheses are tested and supported using data from the National Longitudinal Survey.

Asset specificity, unionization and the firm's use of debt

This paper considers the combined influence of asset specificity and unionization on the firms use of debt. While previous literature tends to examine these effects separately, we find that the interaction of the two is critical. Thus, while asset specificity may reduce debt as in Williamson (1988), the presence of a strong union offsets this. Unionization increases the firms debt as in Bronars and Deere (1991), but asset generality diminishes this effect. We model and test the interactive nature of these two effects. Using firm-specific unionization data and various proxies for asset specificity, we find support for our model.

Job-Match Quality as an Error Component and the Wage-Tenure Profile: A Comparison and Test of Alternative Estimators

The job-matching hypothesis implies that the disturbance of the standard-wage equation is correlated with one of the regressors, tenure, causing an overestimation of the effect of tenure on wages. This hypothesis is tested and consistent estimates of wage-equation parameters obtained using the methods of Hausman (1978). The approach treats job-match quality as a component of the disturbance term, and an error-components estimator is compared to a modified fixed-effects estimator. The results reject the hypothesis of no correlation between the disturbance term and tenure, but the estimated value of the tenure effect is contrary to the matching model. Other models that may be consistent with these results are discussed.

Why Do IPO Firms Conduct Primary Seasoned Equity Offerings

This study examines the reason behind the IPO firms decision to conduct a primary seasoned equity offering (SEO). First, we develop a two-period model of blockholder incentives starting from the IPO stage. The model suggests that the blockholder has an incentive to conduct an SEO after the IPO when the firm is experiencing growth that was not anticipated at the IPO stage. Using a sample of IPO firms during 1992 to 1997, we find that IPO firms with higher unanticipated positive growth are more likely to conduct an SEO during the four years after their IPOs. We find that the firms unanticipated shock and growth positively affect the relative size of the firms seasoned equity offering. We also find that the firms risk measure reduces the probability of conducting an SEO and reduces the relative size of an SEO. Copyright 2003 Eastern Finance Association.

Self-employment, pay systems, and the theory of the firm: An empirical analysis

Abstract The literature on incentives and organizations implies that the costs of monitoring determine the type of pay system utilized. This paper considers self-employment, salary pay, and hourly pay as three distinct pay systems. Using job characteristics from the Dictionary of Occupational Titles merged to Current Population Survey data, I determine which types of jobs each pay system occurs in. Strong support is found for the monitoring cost explanation.

Residual Income Claimancy, Monitoring, and the R&D Firm: Theory with Application to Biotechs

This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Since the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner-managed, more expert-managed, and smaller in size. Cross-sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected. Our approach suggests a process of firm and industry evolution related to technological maturity and points to the importance of incentives rather than risk sharing in determining organizational form, similar to the original analysis of franchising. Copyright

Relationships among estimators of triangular econometric models

Abstract Estimators for triangular models where one endogenous variable may be dichotomous are compared. The selection bias correction method utilized in the simultaneous probit model is applied to standard simultaneous equations models. The resulting estimator is shown to be equivalent to 2SLS in some cases and provides a Hausman (1978) test of endogeneity. Also, other comparisons of estimators are made.

A model of monopoly and “efficient” unions with endogenous union coverage: Positive and normative implications

We present a model of a rent-maximizing union that organizes to increase its coverage of an industry and analyze monopoly and “efficient” unions in this setting. Our model is unique in that we allow for a competitive industry with free entry and find union and nonunion firms coexisting with product market equilibrium. This is achieved by incorporating the insight that firms are heterogeneous in productive characteristics. An important implication of our model is that an “efficient” union that covers a nontrivial share of the market is not efficient and may in fact be less efficient than a monopoly union.