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CEO pay and the Lake Wobegon Effect

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  • Hayes, Rachel M.
  • Schaefer, Scott

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.

Suggested Citation

  • Hayes, Rachel M. & Schaefer, Scott, 2009. "CEO pay and the Lake Wobegon Effect," Journal of Financial Economics, Elsevier, vol. 94(2), pages 280-290, November.
    • Handle: RePEc:eee:jfinec:v:94:y:2009:i:2:p:280-290
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    References listed on IDEAS

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