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Abstract for:

Matching Firms, Managers, and Incentives

Oriana Bandiera,  Luigi Guiso,  Andrea Prat,  Raffaella Sadun,  May 2012
Paper No' CEPDP1144: Full paper (pdf)
Tags: personnel economics; hiring policy; management; performance related pay; performance incentives

Abstract:

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk-aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework.