A principal–agent analysis of pension policy

This paper presents a principal-agent model of pension policy in a world with permanent pension plans and no taxes. Firm managers, as agents of stockholders, choose pension policy to maximize their own welfare. Stockholders, aware of this self-interested behavior, select the optimal linear risk-sharing compensation program to induce conformance of manager actions to stockholder intersts. The paper develops the optimal linear risk-sharing compensation program and pension policy. The comparative static changes in pension policy for a simple case are found and compared to the empirical findings of other researchers. It is argued that the principal-agent hypothesis provides an explanation for the heretofore unexplained empirical regularities of those studies.