Fair and Square: a Theory of Managerial Compensation

Abstract : We propose a new model of managerial compensation contracts. Once employed, a risk-averse manager acquires imperfectly portable skills whose value is stochastic due to industry-wide demand shocks. The manager's actions are not contractible, and the perceived fairness of the compensation contract affects the manager's motivation. If the volatility of profits is sufficiently large and outside offers are sufficiently likely, the equilibrium contract combines a salary with an own-firm stock option. The model's predictions are consistent with empirical regularities concerning contractual shape, the magnitude of variable pay, the lack of indexation, and the prevalence of discretionary severance pay.

---

Overcoming Contractual Incompleteness: the Role of Guiding Principles

Abstract : We develop a model where a buyer and seller contract over a service. The contract encourages the seller to invest and provides a reference point for the transaction. In normal times the contract works well. But with some probability an abnormal state occurs and the service must be modified. This puts the parties below their reference payoffs and may cause costly disagreement. We discuss why neither classical mechanisms nor lawyers’ standard approaches adequately deal with this issue. The adoption by the parties of guiding principles such as loyalty and equity as part of their contract can help.

---

Restitution of Cultural Goods – Loan or Ownership?

Abstract : Recent discussion on the restitution of cultural goods has focused on the form of restitution. Should cultural goods be returned as long-term loans or as permanent restitution? In this paper we explore the difference between these forms of restitution. Loan implies that the host country keeps the ownership but locates the cultural good to the country of origin. Permanent restitution shifts also the ownership to the country of origin. We find that the optimal form of restitution depends on the triggering factor. If restitution is triggered by the host country completing the restoration of the cultural good, restitution should shift the ownership to the country of origin. However, if the country of origin becomes more indispensable to the cultural good, the optimal form of restitution is a long-term loan.

---

the Existence and Nature of Multi-business Firms: Double Specialization and Neighboring Businesses

Abstract : We propose a theory of the scope of the firm and offer supporting evidence. The theory suggests that multi-business firms exist because they allow better deployment of factors that, because of sub-additive bargaining costs, cannot be traded in fractions or rented for short periods. It predicts that the businesses making up multi-business firms are “neighbors” in two senses: their service needs are correlated and factors specialized to one business are also productive in the other. We then look at a sample of acquisitions and document three regularities. First, input intensities of targets change to more closely resemble those of their acquirers. Second, the performance of targets does not catch up to that of their acquirers. Third, acquirers tend to select targets in industries that are similar to their own.

---