Arnold Kling

Optional Scapegoat

Arnold Kling, Great Questions of Economics
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Columnist Robert J. Samuelson is not enamored of executive stock options.

As more executives developed big personal stakes in options, the task of keeping the stock price rising became separate from improving the business and its profitability. This is what seems to have happened at Enron.

Samuelson points out that stock options give executives considerable upside benefits at very little downside risk. This creates incentives for excessive risk-taking.

However, I am not convinced that stock options encourage executives to engage in criminal cover-ups. It seems to me that, if anything, the generosity of stock option plans ought to discourage illegal behavior on the part of executives. If the legal path to riches is easy, what is the incentive to stray off that path?

Discussion Question. Stock options create asymmetric payoffs, in that the executive wins a lot from success and loses relatively less from failure. How does that asymmetry encourage risk-taking, and are there enough offsetting factors within the corporate environment to restrain executives from making rash bets?

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