Matching Firms, Managers, and Incentives

Abstract

We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data include manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals, and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of risk aversion and talent in determining how firms select and motivate managers. In particular, risk-averse managers are matched with firms that offer low-powered contracts. We also show that empirical findings linking governance, incentives, and performance, which are typically observed in isolation, can instead be interpreted within a simple unified matching framework.