TITLE:
Directionally Bounded Utility and the Executive Pay Puzzle
AUTHORS:
Edoh Y. Amiran, Daniel A. Hagen
KEYWORDS:
Executive Pay, Utility Theory, Substitution Effects
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.2,
April
7,
2015
ABSTRACT: The pay of CEOs and
other top executives has risen disproportionately relative to other earnings.
We provide a supply-side explanation based on utility theory using
directionally bounded utility functions. As overall income levels have grown,
the amount of compensation required to induce top executives to sacrifice a
quiet life has risen. We show that directionally bounded utility functions
predict a general rise in compensation for stress. More importantly, such
utility functions can be used to explain why the CEO pay ratio has risen at an
increasing rate, something which other approaches have difficulty explaining.