A Payment Contract Research On Herd Behavior Of Manager

Many scholars focus the research of herd behavior on the phenomenon in capital markets and the behavior of investors. This paper extends the object of study to general managers. The mechanism of managerial herd behavior is analyzed and the payment contract to avoid this behavior is designed and discussed.This paper takes it as key assumptions that managers are individually risk averse, and their remuneration is partly based on relative performance. A formalization of managerial herd behavior is provided on the principle of safety in numbers. The explanation captures the popular theories and researches on this phenomenon.The main conclusion is that herd behavior of the manager is essentially informational cascade, the aim of which is to build up his reputation. The change of manager's payoff structure is an important factor that changes his herd behavior. To avoid the herd behavior of the manager, a new payment contract should consist of three parts, namely a sum of fixed payment, a larger proportion of the residual earnings according to performance of the firm and a high penalty according to the decision quality (innovative decision or informational cascade).