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Managerial Effort, Agency, and Industrial Evolution

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  • Esra Durceylan-Kaygusuz

    (Bilkent University Department of Economics)

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    Abstract

    Simulations of the estimated model characterize managers' effort choices in response to increased product market competition. In the agency model, heightened competitive pressures that cause managerial effort to increase by 23 percent for the lowest productivity firms, which are most likely to exit. However, among high productivity firms, managers decrease their effort levels by 2 percent. In the proprietorship model, managerial effort decreases with heightened competitive pressures for almost all firms, and it does so most dramatically for the low productivity firms. These findings reflect two forces. First, when loss of managerial rents is not an issue, heightened competitive pressures reduce the return to effort. Second, when owners do not internalize the loss of rents that managers suffer in the event of exit, managers use their effort level to try to control exit probabilities. The latter force is at work in the agency model but not the proprietorship model, and it dominates among low productivity firms, which are relatively likely to exit.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 589.

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    Date of creation: 2009
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    Handle: RePEc:red:sed009:589

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    1. Marc J. Melitz & Gianmarco I.P. Ottaviano, 2005. "Market Size, Trade, and Productivity," NBER Working Papers 11393, National Bureau of Economic Research, Inc.
    2. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    3. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1997. "Corporate governance, competition policy and industrial policy," ULB Institutional Repository 2013/9613, ULB -- Universite Libre de Bruxelles.
    4. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau.
    5. Hale Utar, 2006. "Employment Dynamics and Import Competition," 2006 Meeting Papers 298, Society for Economic Dynamics.
    6. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
    7. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: An Inverted-U Relationship," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 701-728, May.
    8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
    9. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
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