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Agency and the Pace of Adoption of New Techniques

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Author Info
Ronald W. ANDERSON (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
Kjell G. NYBORG (London Business School and CEPR)

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Abstract

We study the relation of financial contracting and the pace of technological advance in a dynamic agency theoretic model. A firm which is financed by outside shareholders but run by managers has the prospect of a process innovation which arrives stochastically. Adopting the innovation requires firing old management and hiring new with skills appropriate for the new technique. We show that subgame perfect equilibria in this game can be of two types. In "entrenchment" equilibrium once the new technique has been announced old style management raises their dividend payout sufficiently to preempt the innovation. In "maximum rent extraction" equilibrium' managers are unable or unwilling to match the impending productivity improvement and instead respond by increasing their perquisites for the remaining time of their tenure. We show that both equilibria involve several types of inefficiencies and can resuit in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.

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Publisher Info
Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2002027.

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Length: 18
Date of creation: 01 Jun 2002
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Handle: RePEc:ctl:louvre:2002027

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Related research
Keywords: Contract; Corporate finance; Innovation; Governance;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  2. Aghion, Philippe & Bolton, Patrick, 1992. "Distribution and growth in models of imperfect capital markets," European Economic Review, Elsevier, vol. 36(2-3), pages 603-611, April. [Downloadable!] (restricted)
  3. Kjell G. Nyborg & Ron Anderson, 2001. "Financial Development, Agency and the Pace of Adoption of New Techniques," FMG Discussion Papers dp389, Financial Markets Group. [Downloadable!] (restricted)
  4. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  6. Anderson, Ronald W & Nyborg, Kjell G, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," CEPR Discussion Papers 2920, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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