CEO pay and the Lake Wobegon Effect

Rachel M. Hayes, Scott J Schaefer*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

48 Scopus citations

Abstract

The "Lake Wobegon Effect," which is widely cited as a potential cause for rising CEO pay, is said to occur because no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO's pay package to lag market expectations. We develop a game-theoretic model of this Effect. In our model, a CEO's wage may serve as a signal of match surplus, and therefore affect the value of the firm. We compare equilibria of our model to a full-information case and derive conditions under which equilibrium wages are distorted upward.

Original languageEnglish (US)
Pages (from-to)280-290
Number of pages11
JournalJournal of Financial Economics
Volume94
Issue number2
DOIs
StatePublished - Nov 2009

Keywords

  • Asymmetric information
  • CEO pay
  • Signaling

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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