14:15 - 15:45
Capital (Mis)allocation, Incentives and Productivity
This paper studies how managerial pay shapes the allocation of capital within firms.
Who
Where
Personal details
Matthias Meier is an Assistant Professor at the University of Mannheim and a principal investigator of the Bonn-Mannheim Collaborative Research Center TR 224 funded by the German Research Foundation (DFG). His research interests are Macroeconomics, Monetary Economics, International Economics, and Econometrics.
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We leverage quasi-experimental variation in the composition of managerial pay between cash bonuses and equity compensation. We find that a relative increase in cash bonuses leads firms to reallocate capital toward less durable investment projects. To rationalize the empirical evidence, we develop a quantitative model with agency frictions. In the model, a relative increase in cash bonuses strengthens managerial short-termism, which shifts the investment composition toward less durable projects. The observed change in managerial pay exacerbates within-firm capital misallocation and leads to a sizeable contraction in output.
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Economist
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