Wednesday, August 09, 2006

CEO Tastes and Firm Choices

Microeconomic students should all be familiar with the concept of the "principal-agent problem." A common example used for this is that the people that make decisions (the CEO) on behalf of the owners of a firm (the stockholders) will have different incentives, and thus make different choices. For example, a CEO might care less about the long-term prospects of a firm, and thus take steps to make current performance look great, leading to instant riches from stock options or a switch to another job, and then leave the company to fend for itself later on. Or a business traveler might choose to fly on American Airlines because they have a frequent flier account with American, even though a flight on Continental might be cheaper, and thus better for the firm. Anyway, open an intermediate micro text, and you'll find plenty of examples.

But today I found an interesting example over at Marginal Revolution, which should be required daily reading for economists and economic students. Tyler Cowen quotes an article on what CEOs watch, read, etc and has this bit from Allstate Insurance Chief Marketing Officer(!) Joe Tripodi:
I have iPods (regular, Nano and Shuffle), three TiVos (sacrilege, I know, but time is too short to watch all the commercials), 8700c Blackberry, DirecTV, HDTV, etc.
So the CMO of Allstate Insurance has 3 Tivo DVRs, and uses them to jump through commercials. I thought that was interesting, and so did a Google search and found a WSJ article on Allstate's television advertising:
Allstate Insurance Co. used to be a loyal network-television advertiser. For years, during an annual industry get-together known as the “upfront,” Allstate would pony up about $100 million to buy spots on national TV for the following year.
For the current season... (t)he insurer slashed its upfront spending to $10 million from $70 million two years ago.
Now, it may well be the case that cutting network TV advertising is a good idea because there are lots of people like Tripoldi that skip TV ads. (Though 13% of users frequently forget they can fast-forward.) So maybe this is in the best interest of Allstate shareholders. But it interesting to read that the head of marketing for Allstate both (a) cut Allstate's TV advertising drastically and (b) doesn't like to watch commercials himself.


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