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Dynamic agency and investment theory with time-inconsistent preferences

Author

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  • Liu, Bo
  • Mu, Congming
  • Yang, Jinqiang

Abstract

We incorporate managers’ time-inconsistent preferences into the DeMarzo et al. (2012) model of dynamic agency and the q theory of investment. Our model provides an alternative explanation for underinvestment from the perspective of managers’ time inconsistency. It also shows that firms prefer delaying a cash payout due to managers’ time-inconsistent preferences, and the corresponding distorted investment and payout decisions significantly decrease a firm’s average q and marginal q.

Suggested Citation

  • Liu, Bo & Mu, Congming & Yang, Jinqiang, 2017. "Dynamic agency and investment theory with time-inconsistent preferences," Finance Research Letters, Elsevier, vol. 20(C), pages 88-95.
    • Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:88-95
    DOI: 10.1016/j.frl.2016.09.017
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    Cited by:

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    8. Camilo Hern'andez & Dylan Possamai, 2023. "Time-inconsistent contract theory," Papers 2303.01601, arXiv.org.
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    More about this item

    Keywords

    Principal-agency problem; q Theory; Under-investment; Time-inconsistent preferences; Cash payout;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services

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