CEO Pay and the Lake Wobegon Effect

  title={CEO Pay and the Lake Wobegon Effect},
  author={S. Schaefer and Rachel M. Hayes},
  journal={Financial Accounting},
  • S. Schaefer, Rachel M. Hayes
  • Published 2008
  • Financial Accounting
  • The "Lake Wobegon Effect," which is widely cited as a potential cause for rising CEO pay, is said to occur because no firm wants to admit to having a CEO who is below average, and so no firm allows its CEO's pay package to lag market expectations. We develop a game-theoretic model of this Effect. In our model, a CEO's wage may serve as a signal of match surplus, and therefore affect the value of the firm. We compare equilibria of our model to a full-information case and derive conditions under… CONTINUE READING
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