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A NOTE ON USING EXCESSIVE PERKS TO RESTRAIN THE HIDDEN SAVING PROBLEM

Published online by Cambridge University Press:  03 September 2012

YiLi Chien  and
Joon Song
YiLi Chien
Affiliation:
Federal Reserve Bank of St. Louis
Joon Song*
Affiliation:
Sungkyunkwan University
*
Address correspondence to: Joon Song, Department of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul 110-745, Korea; e-mail: [email protected].
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Abstract

We offer an explanation for why perks are overprovided to high-profile CEOs. Hidden saving by an agent makes it difficult for a principal to control the agent's moral hazard problem. However, an agent typically cannot save perks; for example, a CEO who owns the right to use a private jet for personal use cannot bank the unused airplane hours. Thus, the principal may oversupply the agent perks to avoid the hidden saving problem. When the agent can both exert lower effort and save wage income, i.e., in the presence of the double deviation problem, we show that the principal supplies more perks than the agent would have purchased on his own (i.e., excessive perks).

Keywords

Hidden SavingMoral Hazard ProblemDouble DeviationPerks
Type
Notes
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 480 - 496
Copyright
Copyright © Cambridge University Press 2012 

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