Journal of Financial Economics Vol. 94 No. 2 2009
CEO pay and the Lake Wobegon Effect☆
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.
- DOI
- 10.1016/j.jfineco.2008.12.006
- Volume
- 94
- Issue
- 2
- Pages
- 280-290
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref