How Structural Estimation Decodes Executive Compensation and Agency Costs

In “Structural Estimation of Executive Compensation,” researchers at Carnegie Mellon University analyze recent advances in the structural estimation of agency costs, especially those that arise from the information asymmetry between shareholders and executive management. The monograph appears in Foundations and Trends in Accounting.

Structural estimation of executive compensation combines cross-sectional and longitudinal data relating firms’ performance to the wages, grants, and wealth holdings of managers to quantify principal-agent models characterized by asymmetric information. The estimated models are used to measure the importance of information asymmetries, such as the degree of conflict between executives and the firms they manage, the role of human capital in mitigating conflicting interests, and the social welfare loss from moral hazard.

“Our work describes the data used to estimate these models, explains the theory behind a simple static model of moral hazard, and provides a first approach to estimating them,” explains Robert A. Miller, Richard M. Cyert and Morris DeGroot Professorship in Economics and Statistics, and Professor of Economics and Strategy at the Tepper School of Business, the monograph’s co-author. “We show how the simplest models of moral hazard can be extended to account for other sources of hidden information and dynamic considerations that arise from the life cycle aspirations of managers.”

The study of managerial compensation and executive-shareholder relationships is an area of inquiry in such fields as accounting, economics, and finance. The substantial economic value embodied in non-owner-managed firms and the pivotal role of executives in determining organizational outcomes underscore the significance of understanding incentive mechanisms, say the authors.

Furthermore, corporate governance policy exerts considerable influence over executive compensation practices and organizational oversight. Regulatory frameworks, such as the Sarbanes-Oxley Act and the Dodd-Frank Act, have been implemented to enhance transparency, mitigate excessive risk-taking behavior, and address principal-agent conflicts between executives and shareholders.

“The implications of research on managerial compensation extend beyond individual firms to encompass broader economic

 and policy considerations,” notes Yizhen Xie, PhD candidate in economics at Carnegie Mellon’s Tepper School of Business, who coauthored the monograph. “Insights from structural estimation help organizations optimize compensation structures to enhance performance, minimize agency costs, and attract superior managerial talent. This type of analysis also informs the development and refinement of regulatory frameworks governing executive compensation, corporate disclosure requirements, and governance standards.”

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Summarized from Miller Robert A, Xie Yizhen (2026), "Structural estimation of executive compensation". Foundations and Trends in Accounting, Vol. 20 No. 2 pp. 85–244. https://doi.org/10.1108/FTACC-04-2025-0073