IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Financial Development, Agency and the Pace of Adoption of New Techniques

  • Kjell G. Nyborg
  • Ron Anderson

    ()

We study the relation of financial development 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 techniques has been announced old style management raises their dividend payout sufficiently to pre-empt 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 result in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp389.pdf
Download Restriction: no

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp389.

as
in new window

Length:
Date of creation: Aug 2001
Date of revision:
Handle: RePEc:fmg:fmgdps:dp389
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. 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.
  2. Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
  3. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Ron Anderson & Kjell G. Nyborg, 2001. "Financing and Corporate Growth under Repeated Moral Hazard," FMG Discussion Papers dp376, Financial Markets Group.
  5. 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.
  6. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  7. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp389. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.