The CEO Arms Race |
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| Authors: | Natalia Gritsko Valentina Kozlova William Neilson Bruno Wichmann |
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| Institution: | 1. Department of Economics, University of Tennessee, 916 Volunteer Boulevard, 532 Stokely Management Center, Knoxville, TN 37996, USA;2. Department of Economics, University of Tennessee, 916 Volunteer Boulevard, 534 Stokely Management Center, Knoxville, TN 37996, USA;3. Department of Economics, University of Tennessee, 916 Volunteer Boulevard, 523 Stokely Management Center, Knoxville, TN 37996, USA;4. Department of Resource Economics and Environmental Sociology, University of Alberta, 503 General Services, Edmonton, AB T6G 2H1, Canada |
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| 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. |
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| Keywords: | C72 J33 D82 |
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