Capital (Mis)allocation, Incentives and Productivity

This paper studies how managerial pay shapes the allocation of capital within firms.

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Matthias Meier (Universität Mannheim)

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IWH, conference room and via Zoom

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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.