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Agency Problems and Endogenous Investment Fluctuations

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  • Giovanni Favara

Abstract

This article proposes a theory of investment fluctuations in which the source of the oscillating dynamics is an agency problem between financiers and entrepreneurs. In the model, investment decisions depend on entrepreneurs' initiative to select investment projects ex ante, and financiers' incentive to control entrepreneurs ex post. Too much control discourages entrepreneurial incentive to initiate new investment, whereas too little control jeopardizes its productivity. This initiative-control trade-off is capable of generating endogenous reversal of investment booms, induced by an ongoing deterioration of project profitability. Investment fluctuations may arise even though no external shocks hit the economy and agents are perfectly rational. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Giovanni Favara, 2012. "Agency Problems and Endogenous Investment Fluctuations," Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2301-2342.
  • Handle: RePEc:oup:rfinst:v:25:y:2012:i:7:p:2301-2342
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    File URL: http://hdl.handle.net/10.1093/rfs/hhs009
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    Cited by:

    1. Kubin, Ingrid & Zörner, Thomas O. & Gardini, Laura & Commendatore, Pasquale, 2019. "A credit cycle model with market sentiments," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 159-174.
    2. Ken-ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2021. "Financial Destabilization," Discussion Papers 2103, Graduate School of Economics, Kobe University.
    3. Figueroa, Nicolás & Leukhina, Oksana, 2015. "Lending terms and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 1-21.
    4. Matsuyama, Kiminori & Sushko, Iryna & Gardini, Laura, 2016. "Revisiting the model of credit cycles with Good and Bad projects," Journal of Economic Theory, Elsevier, vol. 163(C), pages 525-556.
    5. Vouldis, Angelos, 2015. "Credit market disequilibrium in Greece (2003-2011) - a Bayesian approach," Working Paper Series 1805, European Central Bank.
    6. Pierre-Richard Agénor & Leonardo Gambacorta & Enisse Kharroubi & Enisse Kharroubi, 2018. "The effects of prudential regulation, financial development and financial openness on economic growth," BIS Working Papers 752, Bank for International Settlements.
    7. Roger B. Myerson, 2012. "A Model of Moral-Hazard Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 847-878.
    8. Silvo, Aino, 2017. "House prices, lending standards, and the macroeconomy," Research Discussion Papers 4/2017, Bank of Finland.
    9. Kikuchi, Tomoo & Stachurski, John & Vachadze, George, 2018. "Volatile capital flows and financial integration: The role of moral hazard," Journal of Economic Theory, Elsevier, vol. 176(C), pages 170-192.
    10. Takuma Kunieda & Akihisa Shibata, 2014. "Credit Market Imperfections and Macroeconomic Instability," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 592-611, December.
    11. Vladimir Asriyan & Luc Laeven & Alberto Martín, 2018. "Collateral Booms and Information Depletion," Working Papers 1064, Barcelona Graduate School of Economics.
    12. Figueroa, Nicolás & Leukhina, Oksana, 2018. "Cash flows and credit cycles," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 318-332.
    13. Ken-ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2021. "Demographic Structure, Knowledge Diffusion, and Endogenous Productivity Growth," ISER Discussion Paper 1118, Institute of Social and Economic Research, Osaka University.
    14. Pierre-Richard Agénor, 2016. "Growth and Welfare Effects of Macroprudential Regulation," Centre for Growth and Business Cycle Research Discussion Paper Series 218, Economics, The Univeristy of Manchester.
    15. Marek Lubiński, 2012. "Wpływ akceleratora finansowego na przebieg wahań koniunkturalnych [ Impact of Financial Accelerator on Business Cycle Fluctuations ]," Prace i Materiały, Instytut Rozwoju Gospodarczego (SGH), vol. 88(1), pages 63-84.

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