Identity in Family Firms: A Theoretical Analysis of Incentives and Contracts

AutorMarcelo Sanches Pagliarussi - Cristiano Costa
CargoUniversidade de São Paulo - Unisinos
Available online at
http://www.anpad.org.br/bar
BAR, Rio de Janeiro, v. 14, n. 3,
art. 1, e170004, 2017
http://dx.doi.org/10.1590/1807-7692bar2017170004
Identity in Family Firms: A Theoretical Analysis of Incentives
and Contracts
Marcelo Sanches Pagliarussi1
Cristiano Costa2
Universidade de São Paulo1
Unisinos2
Received 19 January 2017; received in revised form 24 July 2017 (this paper has been with the
authors for two revisions); accepted 25 July 2017; first published online 23 August 2017.
Editor’s note. Vera Cançado served as Action Editor for this article.
M. S. Pagliarussi, C. Costa 2
BAR, Rio de Janeiro, v. 14, n. 3, art. 1, e170004, 2017 www.anpad.org.br/bar
Abstract
We developed a principal-agent model that coherently and parsimoniously explains previous findings from
research on executive compensation in family firm s. We introduce organizational identification in the model in
order to capture the effect of family firms’ distinctive characteristics on the agent’s behavior. After describing the
optimal incentive contract under moral hazard, we show that the dispersion in the optimal wage profile decreases
as the level of organizational identification of the agent increases. Moreover, we show that agency costs decrease
as the level of organizational identification of the agent increases. Our results imply that hiring a strongly identified
family manager will result in greater expected wealth to the principal and better risk sharing between the parties.
We further analyze two interrelated factors that may drive changes in contract parameters: the degree of altruism
in the family firm, and the level of collectivism of the society in which the firm is located.
Key words: incentives; family firms; organizational identification; altruism; collectivism.

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