Dispersed information and CEO incentives /

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Bibliographic Details
Author / Creator:Schneemeier, Jan Reinhard, author.
Imprint:2015.
Ann Arbor : ProQuest Dissertations & Theses, 2015
Description:1 electronic resource (92 pages)
Language:English
Format: E-Resource Dissertations
Local Note:School code: 0330
URL for this record:http://pi.lib.uchicago.edu/1001/cat/bib/10773170
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Other authors / contributors:University of Chicago. degree granting institution.
ISBN:9781321910896
Notes:Advisors: Tarek A. Hassan Committee members: Juhani Linnainmaa; Richard van Weelden.
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Dissertation Abstracts International, Volume: 76-12(E), Section: A.
English
Summary:The present thesis is concerned with the idea that a lot of information about economic variables is dispersed among individual agents. In the first part, I measure the social cost of stock-based compensation schemes in a model in which the CEO learns from market prices. In my model, all agents commit a small correlated error when forming their expectations about future productivity. The equilibrium stock price thus aggregates private information with noise. I show that a stock-based compensation scheme leads the CEO to overuse the price information by a factor of three, which in turn makes the excess return and investment growth excessively volatile. I calibrate a DSGE model that embeds this mechanism, and estimate an implied welfare loss of 0.55% of permanent consumption. Surprisingly, if households were given the choice within this model of preserving the status quo or forcing the CEO to ignore all price information, they would choose the latter. In the second part (joint with D. Schreindorfer), we study the role of time-varying stock return volatility in a consumption and portfolio choice problem for a life-cycle investor facing short-selling and borrowing constraints. Faced with a benchmark investment strategy that conditions on age and wealth only, we find that an investor is willing to pay a fee of up to 1% - 1.5% of total life time consumption in order to optimally condition on volatility. Tilts in the optimal asset allocation in response to volatility shocks are considerably more pronounced than tilts in response to wealth shocks, and almost as important as life-cycle effects. Lastly, we find that the correlation between volatility and permanent labor income shocks may explain the low equity share of young households in the data.