Dynamic Agency and the q Theory of Investment
Abstractbeen profitable, agency concerns are less severe, and the firm is growing rapidly. To study the effect of serial correlation of productivity shocks on investment and firm dynamics, we extend our model to allow the firmâs output price to be stochastic. We show that, in contrast to static agency models, the agentâs compensation in the optimal dynamic contract will depend not only on the firmâs past performance, but also on output prices, even though they are beyond the agentâs control. This dependence of the agentâs compensation on exogenous output prices (for incentive reasons) further feeds back on the firmâs investment, and provides a channel to amplify and propagate the response of investment to output price shocks via dynamic agency.
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Bibliographic InfoArticle provided by American Finance Association in its journal Journal of Finance.
Volume (Year): 67 (2012)
Issue (Month): 6 (December)
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