Managerial Economics 2nd Edition by William Boyes

Exercise 4

Could rent seeking on the part of the CEO influence the CEO's compensation? Evaluate the following argument. Pay arrangements are set by a Board of Directors that aims to maximize shareholder value by designing an optimal principal- agent contract. But the Board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders.