When to Fire Bad Managers: The Role of Collusion between Management and the Board of Directors

R. Beetsma, H.J.M. Peters, E. Rebers

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Abstract

We develop a model in which a shareholder hires a director to monitor a manager who faces stochastic firing costs. We study the optimal incentive scheme for the director, allowing for the possibility that the manager bribes the director in order to change his firing intentions. Such collusion may be in the interest of the shareholder, because it avoids the need to (ex ante) compensate the manager for very high realisations of his firing costs (these are precisely the cases in which collusion occurs).
Original languageEnglish
Pages (from-to)427-444
JournalJournal of Economic Behavior & Organization
Volume42
Issue number4
DOIs
Publication statusPublished - 1 Jan 2000

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