Working paper

Equilibrium CEO Contract with Belief Heterogeneity

Milo Bianchi, Rose-Anne Dana, and Elyès Jouini


Consider a rm owned by shareholders with heterogeneous beliefs and run by a manager who chooses random production plans. Shareholders do not observe the chosen plan but only its realization. The nancial market consists of assets contingent on production realizations. A contract for the manager species her compensation as a function of the rms production and possibly some restrictions to trade in the nancial market. Shareholders are unrestricted. We dene a concept of equilibrium between the manager and shareholders such that the equilibrium production plan is unanimously preferred by the manager and the shareholders, markets clear and the manager has no incentive to cheat. We rst analyze the properties of such equilibria and in particular show that the contract should restrict the manager from trading. We next provide a framework where such equilibria exist. We lastly study the properties of equilibrium compensations when shareholders have beliefs that can be ranked in terms of optimism towards the equilibrium plan. Specic attention is given to their departure from linear compensations.


heterogeneous beliefs; asymmetric information; manager-shareholders equi-; librium.;

JEL codes

  • G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
  • G34: Mergers • Acquisitions • Restructuring • Corporate Governance
  • D24: Production • Cost • Capital • Capital, Total Factor, and Multifactor Productivity • Capacity
  • D51: Exchange and Production Economies
  • D70: General


Milo Bianchi, Rose-Anne Dana, and Elyès Jouini, Equilibrium CEO Contract with Belief Heterogeneity, TSE Working Paper, n. 21-1253, April 2021.

See also

Published in

TSE Working Paper, n. 21-1253, April 2021