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Agency and the Pace of Adoption of New Techniques


  • Ronald W. Anderson
  • Kjell G. Nyborg


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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Suggested Citation

  • Ronald W. Anderson & Kjell G. Nyborg, 2002. "Agency and the Pace of Adoption of New Techniques," Recherches économiques de Louvain, De Boeck Université, vol. 68(1), pages 203-220.
  • Handle: RePEc:cai:reldbu:rel_681_0203

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    References listed on IDEAS

    1. Anderson, Ronald W. & Nyborg, Kjell G., 2011. "Financing and corporate growth under repeated moral hazard," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 1-24, January.
    2. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    3. 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.
    4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    5. Anderson, Ronald W. & Nyborg, Kjell G., 2001. "Financial development, agency and the pace of adoption of new techniques," LSE Research Online Documents on Economics 25065, London School of Economics and Political Science, LSE Library.
    6. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
    7. 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.
    8. Abhijit Banerjee & Andrew F. Newman, 1989. "Risk-Bearing and the Theory of Income Distribution," Discussion Papers 877, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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