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We study the relationship between pay gaps among top executives and firm value using the insights from a principal-agent framework. Large pay gaps on one hand reduce managerial shirking by imposing a large promotion incentive, and on the other hand they can induce counter-productive rivalries. Hence, both the pay gap level and its impact on firm value are jointly determined by the firm's optimizing pay gap so that the marginal benefit of reducing managerial moral hazard is balanced against thedoi:10.2139/ssrn.2275468 fatcat:wqoygbg5kngghlgk7d7lusm62q