In competitive markets, managers have a strong incentive to give their best effort. But economists have long argued that when companies are insulated from competition, their managers may not be motivated to maximize the profit of the firm and instead may choose to enjoy the “quiet life.” Similarly, without sufficient monitoring by owners of the firms or the stock market, managers might be tempted to enjoy the quiet life instead of making hard decisions or taking on difficult tasks.
The “Quiet Life” Hypothesis Is Real: Managers Will Put Off Hard Decisions If They Can
But competition and monitoring can spur them to act.
January 09, 2018
Summary.
Economists have long argued that when companies are insulated from competition and are unmonitored, their managers may not be motivated to maximize the profit of the firm and instead may choose to enjoy the “quiet life.” But are the economists right? Left to their own devices, do managers really prefer the quiet life? A new paper empirically tests this quiet life hypothesis with Japanese data. The results are consistent with the hypothesis: Without competition or monitoring, managers do seem to put off hard decisions.