CEO pay and the Lake Wobegon Effect |
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| Authors: | Rachel M. Hayes Scott Schaefer |
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| Affiliation: | 1. David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA;2. David Eccles School of Business and Institute for Public and International Affairs, University of Utah, Salt Lake City, UT 84112, USA |
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| 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. |
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| Keywords: | G34 J33 |
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