The (ir)resistible rise of agency rents
AbstractThe rents agents can extract from principals increase with the magnitude of incentive problems, which the literature usually takes as given. We endogenize it, by allowing agents to choose technologies that are more or less opaque and correspondingly prone to agency problems. In our overlapping generations model, agents compete with their predecessors. We study whether the presence of old- timers earning low rents can keep young managersrent-seeking in check. With dynamic contracts, long horizons help principals incentivize agents. Hence, old agents are imperfect substitutes for young ones. This mutes down competition between generations, especially if compensation deferral is strong. As a result, young managers can opt for more opaque and complex technologies, and therefore larger rents, than their predecessors. Thus, in equilibrium, complexity and rents rise over time.
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Date of creation: May 2013
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Agency rents; moral hazard; nance sector; dynamic contracts; opacity.;
Other versions of this item:
- D3 - Microeconomics - - Distribution
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-13 (All new papers)
- NEP-CDM-2013-09-13 (Collective Decision-Making)
- NEP-CTA-2013-09-13 (Contract Theory & Applications)
- NEP-HRM-2013-09-13 (Human Capital & Human Resource Management)
- NEP-MIC-2013-09-13 (Microeconomics)
- NEP-POL-2013-09-13 (Positive Political Economics)
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