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Why do reputable agents work for safer firms?

  • Li, Fei
  • Ueda, Masako

Safer firms receive funding from reputable venture capitalists and offer new securities underwritten by reputable investment banks. We offer a new explanation for these facts employing a moral-hazard model in which a firm and an agent are matched endogenously. More reputable agent's effort has a greater impact on output. Safer firm's output reflects the agent's hidden effort more accurately and therefore the agent's pay scheme tied with the output powerfully motivates her to exert effort. In equilibrium, a safer firm should be matched with a reputable agent since this combination allows to maximize effort of the reputable agent.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 6 (2009)
Issue (Month): 1 (March)
Pages: 2-12

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Handle: RePEc:eee:finlet:v:6:y:2009:i:1:p:2-12
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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