CEO pay and the Lake Wobegon Effect

Rachel M. Hayes; Scott J Schaefer

doi:10.1016/j.jfineco.2008.12.006

CEO pay and the Lake Wobegon Effect

Rachel M. Hayes, Scott J Schaefer^*

^*Corresponding author for this work

Strategy

Research output: Contribution to journal › Article › peer-review

51 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 language	English (US)
Pages (from-to)	280-290
Number of pages	11
Journal	Journal of Financial Economics
Volume	94
Issue number	2
DOIs	https://doi.org/10.1016/j.jfineco.2008.12.006
State	Published - Nov 2009

Keywords

Asymmetric information
CEO pay
Signaling

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2008.12.006

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author = "Hayes, {Rachel M.} and Schaefer, {Scott J}",

note = "Funding Information: We are grateful for the financial support of the Kellogg School of Management at Northwestern University, where Scott Schaefer was a visiting professor while completing this work. We thank Hank Bessembinder, Mike Lemmon, and Paul Oyer for helpful discussions, and seminar participants at Utah and Arizona for comments. Copyright: Copyright 2009 Elsevier B.V., All rights reserved.",

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CEO pay and the Lake Wobegon Effect

Abstract

Keywords

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