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Assignment shifts away from positive assortative matching: firms with greater risk or higher disutility select less talented CEOs and offer higher cross-sectional salaries. Economywide changes in risk or CEO disutility do not move pay, while incentive strength depends only on effort disutility. Allowing CEOs to affect firm risk increases and strengthens incentives, consistent with calibrated governance losses.",{"@graph":69,"@context":123},[70,84,106],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/the-effect-of-risk-on-the-ceo-market/153912/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/the-effect-of-risk-on-the-ceo-market/153912.png","ImageObject",300,407,{"name":92,"@type":93},"Gloria","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-27","2026-08-28",true,{"@type":102,"interactionType":103,"userInteractionCount":105},"InteractionCounter",{"@type":104},"ViewAction",13,{"@type":107,"mainEntity":108},"FAQPage",[109,115,119],{"name":110,"@type":111,"acceptedAnswer":112},"How does moral hazard change CEO assignment in the model?","Question",{"text":113,"@type":114},"Firms with higher risk or higher disutility choose less talented CEOs, distorting the allocation away from positive assortative matching on firm size.","Answer",{"name":116,"@type":111,"acceptedAnswer":117},"What determines the strength of incentives in this framework?",{"text":118,"@type":114},"Incentives depend only on the disutility of effort and are independent of risk and risk aversion under the baseline setting.",{"name":120,"@type":111,"acceptedAnswer":121},"What happens to incentives if the CEO can influence firm risk?",{"text":122,"@type":114},"Incentive strength rises and becomes increasing in both risk and risk aversion when the CEO affects firm risk.","https://schema.org",{"og:url":83,"og:type":125,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":127,"canonical":83},"index,follow",{"doc_id":129,"site_id":62},153912,1787884117,{"code":4,"msg":5,"data":132},{"doc_id":129,"user_id":133,"nickname":92,"user_avatar":134,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":135,"file_id":136,"file_url":137,"file_type":138,"file_size":139,"view_count":105,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":140,"language":141,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":142,"faqs":143,"seo_title":144,"seo_description":67,"update_tm":130,"read_time":145,"preview_page_count":4},2336474459895,"https://ap-avatar.wpscdn.com/avatar/22000baeef7a5ed0655?x-image-process=image/resize,m_fixed,w_180,h_180&k=1786071322749376916","The Effect of Risk on the CEO Market  \nAlex Edmans  \nWharton School, University of Pennsylvania  \nXavier Gabaix  \nNYU Stern School of Business, CEPR and NBER  \nThis article presents a market equilibrium model of CEO assignment, pay, and incentives under risk aversion and moral hazard. Each of the three outcomes can be summarized by a single closed-form equation. In the presence of moral hazard, assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented CEOs. Such firms also pay higher salaries in the cross-section, but economywide increases in risk or the disutility of being a CEO do not affect pay. The strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion. If the CEO can affect firm risk, incentives rise and are increasing in risk and risk aversion. We calibrate the losses from various forms of poor corporate governance, such as failures in monitoring and inefficiencies in CEO assignment. (JEL G34, J33)  \nThis article presents a market equilibrium model of CEO assignment, pay, and incentives. Risk-averse managers of different talents are hired in a competitive market by heterogeneous firms, which vary in their size, risk, and level of effort required. The level of pay drives the assignment of talent to firms. The strength of incentives induces the efficient effort level, and is determined by an optimal contracting approach.  \nOur main contribution is to incorporate risk into a CEO market equilibrium in a tractable manner. A large empirical literature has shown that risk is a firstorder determinant of compensation contracts (Demsetz and Lehn 1985; Garen 1994; Core and Guay 1999; Oyer and Schaefer 2004; Peters 2009; Peters and Wagner 2009), but most theories assume risk-neutrality. This assumption is  \nWe thank an anonymous referee, the Editor (Paolo Fulghieri), Chris Armstrong, Karthik Balakrishnan, Philip Bond, Jess Cornaggia, Ingolf Dittmann, Vincent Glode, Todd Gormley, Sebastian Gryglewicz, Richard Holden, Oguzhan Karakas, Holger Mueller, Derek Neal, Greg Nini, Gustav Sigurdsson, Leonid Spesivtsev, Luke Taylor, and seminar participants at Chicago, Indiana, LBS, NYU, Penn State, Philadelphia Fed, Richmond Fed, Wharton, NBER Summer Institute (Law and Economics), Rotterdam Workshop on Executive Compensation and Corporate Governance, and Theory Conference on Corporate Finance and Financial Markets for valued input, and Qi Liu and Guan Yang for research assistance. We thank Ingolf Dittmann for generously sharing his data on CEO non-firm wealth. AE gratefully acknowledges the Goldman Sachs Research Fellowship from the Rodney L. White Center for Financial Research. This article was previously entitled “Risk and the CEO Market: Why Do Some Large Firms Hire Highly-paid, Low-talent CEOs?” Send correspondence to Alex Edmans, 3620 Locust Walk, Philadelphia, PA 19104; telephone: (215) 746-0498. Email: [aedmans@wharton.upenn.edu](aedmans@wharton.upenn.edu). Xavier Gabaix, 44 West 4th Street, New York, NY 10012; telephone: (212) 998-0257 . Email: xgabaix@stern. [nyu.edu](nyu.edu).  \n􀀍c The Author 2011 . Published by Oxford University Press on behalf of The Society for Financial Studies.  \nAll rights reserved. For Permissions, please e-mail: [journals.permissions@oup.com](journals.permissions@oup.com).  \ndoi:10.1093/rfs/hhq153 Advance Access publication March 17, 2011  \nDownloaded from [http://rfs.oxfordjournals.org/](http://rfs.oxfordjournals.org/ at New York University School of Law on November 21)[ at New York University School of Law on November 21](http://rfs.oxfordjournals.org/ at New York University School of Law on November 21), 2011  \n1  \noften necessitated by the fact that adding risk aversion is typically a non-trivial extension that leads to highly complex contracts. Often, the contract cannot be solved in closed form, which makes it difficult to understand the economic intuition and see which featur","cbCaik1i5UrQoC0H","https://ap.wps.com/l/cbCaik1i5UrQoC0H","pdf",307396,42,"English","# Risk and CEO Market Equilibrium Model\n## Assignment Distortions Under Moral Hazard\n## Pay and Incentive Implications of Risk","[{\"question\":\"How does moral hazard change CEO assignment in the model?\",\"answer\":\"Firms with higher risk or higher disutility choose less talented CEOs, distorting the allocation away from positive assortative matching on firm size.\"},{\"question\":\"What determines the strength of incentives in this framework?\",\"answer\":\"Incentives depend only on the disutility of effort and are independent of risk and risk aversion under the baseline setting.\"},{\"question\":\"What happens to incentives if the CEO can influence firm risk?\",\"answer\":\"Incentive strength rises and becomes increasing in both risk and risk aversion when the CEO affects firm risk.\"}]","The Effect of Risk on the CEO Market | PDF",106]