IDEAS home Printed from https://ideas.repec.org/a/oup/econjl/v129y2019i624p3092-3106..html
   My bibliography  Save this article

Size Matters: How Over-Investments Relax Liquidity Constraints in Relational Contracts

Author

Listed:
  • Florian Englmaier
  • Matthias Fahn

Abstract

The corporate finance literature documents that managers tend to over-invest in their companies. A number of theoretical contributions have aimed at explaining this stylised fact and most have focused on a fundamental agency problem between shareholders and managers. This article shows that over-investments are not necessarily the (negative) consequence of agency problems between shareholders and managers but instead might be a second-best optimal response to address problems of limited commitment and limited liquidity. If a firm has to rely on relational contracts to motivate its workforce and if it faces a volatile environment, then investments into general, non-relationship-specific capital can increase the efficiency of a firm’s labour relations.

Suggested Citation

  • Florian Englmaier & Matthias Fahn, 2019. "Size Matters: How Over-Investments Relax Liquidity Constraints in Relational Contracts," The Economic Journal, Royal Economic Society, vol. 129(624), pages 3092-3106.
    • Handle: RePEc:oup:econjl:v:129:y:2019:i:624:p:3092-3106.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/ej/uez029
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthias Fahn, 2019. "Reciprocity in dynamic employment relationships," CESifo Working Paper Series 7634, CESifo.
    2. Daniel Barron & Jin Li & Michał Zator, 2022. "Morale and Debt Dynamics," Management Science, INFORMS, vol. 68(6), pages 4496-4516, June.
    3. Francesc Dilmé & Daniel F. Garrett, 2023. "Relational Contracts: Public versus Private Savings," Econometrica, Econometric Society, vol. 91(3), pages 1025-1075, May.
    4. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    5. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:econjl:v:129:y:2019:i:624:p:3092-3106.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.