The CEO Arms Race. (1st January 2013)

• Record Type: Journal Article
• Authors: Gritsko, Natalia; Kozlova, Valentina; Neilson, William; Wichmann, Bruno
• Is Part Of: Southern economic journal. Volume 79:Number 3(2013)
• Page Start: 586
• Page End: 599
• Publication Date: 2013-01-01
• Subjects: C72 -- J33 -- D82; Southern States -- Economic conditions -- Periodicals; Economics -- Periodicals; Economic history; Economics; Southern States; Periodicals; 330.975005
• DOI: 10.4284/0038-4038-2011.215
• Languages: English
• ISSNs: 0038-4038

Abstract

Abstract : This article constructs a game‐theoretic model in which high chief executive officer (CEO) pay emerges as the outcome of an arms race, with each firm hiring a highly paid CEO to protect its competitive position against rivals who also hire highly paid CEOs. For an arms race to emerge, highly paid CEOs must generate idiosyncratic, privately known internal effects on profit, and CEO pay disparities must also generate asymmetric profit differences from external effects beyond the simple differences in pay. If the distribution of internal effects satisfies a key uniformity condition, an arms race emerges as the only equilibrium of the game.