Volume 55, Number 3-4

This is a special service from CESifo, alerting you to the contents of CESifo Economic Studies, an influential economics journal published by Oxford University Press (OUP) and listed in the Social Sciences Citation Index (SSCI). Register through the OUP website (see bottom of this newsletter) to receive e-mail or RSS alerting services.

This double issue is devoted to two highly topical themes: executive pay, and inequality in China.

Jump to Inequality in China section

What, you're taking away my company Porsche? And the boat too!?

Searching for Reasonable Compensation
After examining compensation packages, Eugene Kandel concludes that their magnitude appears to be excessive. He then proposes specific regulatory measures to make compensation transparent and predictable. But he warns against blindly applying "pay for performance" schemes: they may provide some perverse incentives, so they have to be applied carefully. In his opinion, executive compensation contracts, of which he provides some general designs, should play a much more important role in the regulation of financial markets.
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Let's shine a light on that paycheck

What History Teaches
Carola Frydman casts a glance back in “Learning from the Past: Trends in Executive Compensation over the Twentieth Century.” She finds that current theories have difficulties determining which factors have caused the rapid rise in CEO pay over time. Using a case study of General Electric, she observes that the evidence for earlier decades can illuminate recent trends, revealing the limitations of current explanations to address the long-run data.
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Fraternizing with the Boss
A board that is too friendly to executives is bad for governance, it is often argued. But it is not that simple, argue Renée Adams and Daniel Ferreira. Using a new proxy for board monitoring, they provide evidence that, in some cases, such as low CEO ownership or high private benefits, it may be best for the board to commit to a low monitoring intensity. This has implications for the design and evaluation of governance structures.
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Insider payoff

Insider Advantage
There is evidence that managers posssess private information they exploit for financial gain at the expense of shareholders. Quite a shameful thing, isn't it. But George-Levi Gayle and Robert A. Miller show that, in practice, shareholders and managers might optimally agree upon an arrangement where managers systematically exploit their private information about the firm. It is definitely worth reading why.
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A Taxing Issue
Peter Katuščák analyses the impact of personal income taxation on executive compensation, specifically in contracts generated by stock options and restricted stock grants. He finds that after-tax incentive provision for executives is quite sensitive to variation in the ordinary income tax rate.
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Chinese Inequality

A load of inequality

A Taxing Issue
Quheng Deng and Shi Li examine what lies behind rising earnings inequality in China, using regression-based decomposition methods. They find that the effects on earnings inequality of gender and membership in the Communist Party of China have changed little, that the effects of education and occupation have increased, and that regional effects have been the largest recent contributor to earnings inequality.
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Accounting for Volatility
Existing estimates of the urban-rural poverty gap do not take into account the higher volatility of rural incomes in China. John Whalley and Ximing Yue argue that it is precisely this volatility that increases the effective urban-rural income gap and intensifies concerns over poverty. Applying certainty equivalents to Chinese survey data in order to adjust rural income for volatility, they find that the measured urban-rural income gap increases by up to 20%. Similar analyses using consumption data show even slightly larger increases in the adjusted urban-rural income gap.
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