Law Commons^™

Executive Compensation In America: Optimal Contracting Or Extraction Of Rents?, Lucian A. Bebchuk, Jesse M. Fried, David I. Walker

Faculty Scholarship

This paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, 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 and, …