A NOTE ON USING EXCESSIVE PERKS TO RESTRAIN THE HIDDEN SAVING PROBLEM

Abstract

We offer an explanation for why perks are overprovided to high-profile CEOs. Hidden saving by an agent makes it difficult for a principal to control the agent's moral hazard problem. However, an agent typically cannot save perks; for example, a CEO who owns the right to use a private jet for personal use cannot bank the unused airplane hours. Thus, the principal may oversupply the agent perks to avoid the hidden saving problem. When the agent canbothexert lower effortandsave wage income, i.e., in the presence of thedouble deviation problem, we show that the principal supplies more perks than the agent would have purchased on his own (i.e.,excessiveperks).