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Corporate Governance and Neoclassical Economics

Abstract Although the term “corporate governance” is relatively new in the economist’s lexicon, the issues with which it is concerned are as old as the profession itself. In this article, first I try to illustrate this, and then I trace the development of the literature, including discussions of the so-called managerial discretion literature and the principal–agent literature. Following a discussion of asset bubbles, I illustrate the tension between concerns about corporate governance and neoclassical economics by examining the literature on managerial compensation and mergers. This literature reveals a wide gap between traditional neoclassical economics and more recent developments in behavioral economics.