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This paper examines the loss participation of executives following the German law of adequacy of executive directors’ compensation (VorstAG). First I provide an overview and discussion of the relevant law’ contents. To examine the potential economic impact of the loss participation, a modified tournament model is introduced. The model implies that the aspired participation succeds only partially. Hence, the law might probably fail in it’s purpose of lowering executive directors’ compensation.

A monopolist is treated as a nexus of contracts with team production. It has one ownermanager who is the employer of two employees. A team production problem is present if the employer is a "managerial lemon." If the team production problem is solved, the employer is a "managerial hotshot." Both managerial hotshot and managerial lemon are found to make profit.Therefore, managerial slack can exist in our monopoly market. Whereas the employer has the incentive to improve management capability in principle, the employees have the incentive to keep management capability low. Moreover, the cost of improving management capability may be prohibitively high. Consequently, managerial slack can persist. The predicted behavior of the monopolist contradicts the neoclassical prediction of market performance in both cases.