Pareto Weights with Hidden Actions Model

Ponente(s): Itza Tlaloc Quetzalcoatl Curiel Cabral

This article investigates the features of Pareto-optimal bargaining contracts, emphasizing the role of bargaining power and outside options in incentive contract negotiations. By integrating elements from agency theory, managerial theory, and cooperative bargaining, this paper explores the dynamics of CEO bargaining power and its impact on corporate governance and firm performance. The paper develops a Pareto weights model with hidden actions, where the Board designs take-it-or-leave-it contracts between a firm’s owner and manager. Bargaining power is treated as an exogenous variable, influencing executive compensation, board dynamics, and strategic decision-making. The model is constrained by the incentive compatibility and individual rationality constraints for both the manager and the owner. This approach extends the analysis of traditional principal-agent models, revealing how outside options and bargaining power shape equilibrium outcomes. Rather than comparing existing solutions such as Nash, Kalai-Smorodinsky, and utilitarian bargaining methods, this paper extends their insights by incorporating hidden actions and agency frictions into a unified framework.