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The Dynamics of Bargaining Power in a Principal-Agent Model

Author

Listed:
  • Sonia B. Di Giannatale

    (Division of Economics, CIDE)

  • Itza Tlaloc Quetzalcoatl Curiel-Cabral

    (Division of Economics, CIDE)

  • Genaro Basulto

    (Tepper School of Business, Carnegie Mellon)

Abstract

We propose a dynamic principal-agent model where the agent's initial bargaining power is the state variable and a law of motion that governs their bargaining power's behavior. Our numerical results indicate that agents with the same relative risk aversion might show dif- ferent paths of their bargaining powers, and that more powerful the incentives ensue higher variability in the agent's salary. We implement an empirical equation to identify CEOs' bar- gaining power and find a set of values of the state variable for which the proposed dynamics explains well the relationship between firm performance and CEO compensation. Finally, by analyzing a panel sample of annual observations for 9,084 CEOs in the U.S., we conclude that our estimates are consistent with empirical findings of a slow yearly growth in CEOs' compensation.

Suggested Citation

  • Sonia B. Di Giannatale & Itza Tlaloc Quetzalcoatl Curiel-Cabral & Genaro Basulto, 2023. "The Dynamics of Bargaining Power in a Principal-Agent Model," Working Papers DTE 630, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte630
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dynamic Analysis; Contract Theory; Executive Compensation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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