By William K. Black
(Cross posted at Benzinga.com)
This is the sixth (and final) of my series of articles on the work of Roger Myerson, a 2007 Laureate in Economics. Myerson’s work on CEOs is typical of the game theoretical approach to explaining the behavior of CEOs and firms, so I am discussing an exemplar rather than an outlier. This installment discusses some of the fatal flaws that I argue characterize the game theoretical work on CEOs by the Laureates. I will urge that they are weakest where they believe they are strongest – their models. The article explains why the models are specified incorrectly because the models have no coherent theory (or understanding) of fraud or ethics. The game theoretical Laureates (Laureates) make unsupportable implicit assumptions that are belied by the data and internally inconsistent with their explicit assumptions.