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

Abstract We developed a principal-agent model that coherently and parsimoniously explains previous findings from research on executive compensation in family firms. 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 organizationa...