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Why do reputable agents work for safer firms?

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Author Info

  • Li, Fei
  • Ueda, Masako

Abstract

Safer firms receive funding from reputable venture capitalists and offer new securities underwritten by reputable investment banks. We offer a new explanation for these facts employing a moral-hazard model in which a firm and an agent are matched endogenously. More reputable agent's effort has a greater impact on output. Safer firm's output reflects the agent's hidden effort more accurately and therefore the agent's pay scheme tied with the output powerfully motivates her to exert effort. In equilibrium, a safer firm should be matched with a reputable agent since this combination allows to maximize effort of the reputable agent.

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Bibliographic Info

Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 1 (March)
Pages: 2-12

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Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:2-12

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Web page: http://www.elsevier.com/locate/frl

Related research

Keywords: Moral hazard Matching Project risks;

References

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  1. Chitru S. Fernando & Vladimir A. Gatchev & Paul A. Spindt, 2005. "Wanna Dance? How Firms and Underwriters Choose Each Other," Journal of Finance, American Finance Association, vol. 60(5), pages 2437-2469, October.
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  8. Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, 07.
  9. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  10. Konstantinos Serfes, 2008. "Endogenous matching in a market with heterogeneous principals and agents," International Journal of Game Theory, Springer, vol. 36(3), pages 587-619, March.
  11. Bo Becker, 2006. "Wealth and Executive Compensation," Journal of Finance, American Finance Association, vol. 61(1), pages 379-397, 02.
  12. Jan Eeckhout, 2006. "Local Supermodularity and Unique Assortative Matching," 2006 Meeting Papers 127, Society for Economic Dynamics.
  13. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
  14. DAM, Kaniska, 2007. "A two-sided matching model of monitored finance," CORE Discussion Papers 2007005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Marco Marini & Paolo Polidori & Davide Ticchi & Désirée Teobaldelli, 2013. "Optimal Incentives in a Principal-Agent Model with Endogenous Technology," Working Papers 1304, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2013.

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