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The effects of pay regulation when agents are loss averse

Städter, Silvio



Abstract

This article analyses the effects of a regulatory cap on executive pay when the agent is loss averse. I use a principal-agent model with moral hazard in which a principal and an agent bargain over an incentive contract. I show that even a non-binding cap on the agent's payments can have consequences for the bargained outcome and consequently for the effort the agent exerts.


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