Agency Costs, Firm Behaviour and the Nature of Competition
AbstractThis paper develops an agency model in which firms can influence their own incentives to provide a non-contractible effort by contracting on other variables (e.g. by committing themselves to some verifiable investment). In such a model the firms' need for outside finance is shown to interact with their product market behavior in a non-monotonic way; for low levels of outside finance a rise in the need for outside finance reduces the manager's incentive to provide effort; but for high initial levels of outside finance a rise in the need for outside finance requires a commitment to higher effort which in turn is achieved through the contractible investment variables. This non-monotonicity has major implications for firm behavior, both when responding to demand shocks or when reacting to a change in the competitive environment.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2130.
Date of creation: Apr 1999
Date of revision:
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Other versions of this item:
- Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1997. "Agency Costs, Firm Behavior and the Nature of Competition," IDEI Working Papers 77, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2000.
- E0 - Macroeconomics and Monetary Economics - - General
- L0 - Industrial Organization - - General
- O0 - Economic Development, Technological Change, and Growth - - General
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