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The (ir)resistible rise of agency rents

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  • Biais, Bruno
  • Landier, Augustin

Abstract

The rents agents can extract from principals increase with the magnitude of incentive problems, which the literature usually takes as given. We endogenize it, by allowing agents to choose technologies that are more or less opaque and correspondingly prone to agency problems. In our overlapping generations model, agents compete with their predecessors. We study whether the presence of old-timers earning low rents can keep young managers' rent-seeking in check. With dynamic contracts, long horizons help principals incentivize agents. Hence, old agents are imperfect substitutes for young ones. This mutes down competition between generations, especially if compensation deferral is strong. As a result, young managers can opt for more opaque and complex technologies, and therefore larger rents, than their predecessors. Thus, in equilibrium, complexity and rents rise over time.

Suggested Citation

  • Biais, Bruno & Landier, Augustin, 2013. "The (ir)resistible rise of agency rents," IDEI Working Papers 788, Institut d'Économie Industrielle (IDEI), Toulouse.
    • Handle: RePEc:ide:wpaper:27436
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D3 - Microeconomics - - Distribution
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services

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