Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

Does Executive Comp Cause Big Recessions?

A new academic paper makes a credible argument that stock option contracts for executives can cause excessively large swings in the economy. The paper, which I think is destined to become a classic, has a great title: “Some Unpleasant General Equilibrium Implications of Executive Incentive Compensation Contracts. ”

John Donaldson, Natalia Gershun and Marc Giannoni( of the Columbia Business School, Pace University, and Columbia Business School) examine stock options, and point out that:

With such a compensation contract, a given increase in the firm’s output generated by an additional unit of physical investment results in a more than proportional increase in the manager’s income. We find that incentive contracts of this form can easily result in an indeterminate general equilibrium, with business cycles driven by self-fulfilling fluctuations in the manager’s expectations. These expectations are unrelated to fundamentals. Arbitrarily large fluctuations in macroeconomic variables may possibly result.

Arbitrarily large!

This is not a good thing. What it means is that managerial confidence, rather than consumer confidence, has now become a central driving force for economic fluctuations.

blog comments powered by Disqus