Monday, October 17, 2016

Some Support For Free Markets From Nobel Prize Winner Bengt Holmstrom

See From Corporate Pay to Private Prisons—Lessons From the Nobelists What’s the best way to reward managers? Are contract jails a good idea? Professors at Harvard and MIT win for their insights.
By David Henderson in the WSJ.
"Mr. Holmstrom has been an outspoken skeptic about financial regulation. In a 2003 study of corporate governance, Mr. Holmstrom and co-author Steven N. Kaplan acknowledged the scandals at Enron, WorldCom and other companies. But they concluded that the evidence, such as economic growth and American stock-market gains, “suggests a system that is well above average.”

The study noted that the leveraged buyouts of the 1980s were tremendously productive and a mechanism for disciplining managers to focus on increasing value. They wrote that “shareholders appear better off with the U.S. system of executive pay than with the systems that prevail in other countries.” While not opposing all regulation, they said that “the greatest risk now facing the U.S. corporate governance system is the possibility of overregulation.” Admittedly that was before the financial crisis, but it was also before Congress enacted Dodd-Frank."

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