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Agency Costs, Firm Behavior and the Nature of Competition

Author

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  • Aghion, Philippe
  • Dewatripont, Mathias
  • Rey, Patrick

Abstract

This paper develops an agency model in which firms can influence their own incentives to provide a non-contractible effort by contracting on other variables (e.g. by committing themselves to some verifiable investment). In such a model the firms' need for outside finance is shown to interact with their product market behavior in a non-monotonic way; for low levels of outside finance a rise in the need for outside finance reduces the manager's incentive to provide effort; but for high initial levels of outside finance a rise in the need for outside finance requires a commitment to higher effort which in turn is achieved through the contractible investment variables. This non-monotonicity has major implications for firm behavior, both when responding to demand shocks or when reacting to a change in the competitive environment.
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Suggested Citation

  • Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1997. "Agency Costs, Firm Behavior and the Nature of Competition," IDEI Working Papers 77, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2000.
  • Handle: RePEc:ide:wpaper:672
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    Citations

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    Cited by:

    1. Giacinta Cestone, 1999. "Corporate Financing and Product Market Competition: An Overview," CSEF Working Papers 18, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Giacinta Cestone & Lucy White, 2003. "Anticompetitive Financial Contracting: The Design of Financial Claims," Journal of Finance, American Finance Association, vol. 58(5), pages 2109-2142, October.
    3. Da Rin, Marco & Hellmann, Thomas, 2002. "Banks as Catalysts for Industrialization," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 366-397, October.
    4. Nicolas Boccard, 2001. "Financing Start-ups: Advising vs. Competing," CSEF Working Papers 64, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    5. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.
    6. Al-Jarhi, Mabid Ali, 2005. "The Case For Universal Banking As A Component Of Islamic Banking," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 13, pages 2-65.
    7. Michele Cincera, 2002. "Financing constraints, fixed capital and R&D investment decisions of belgian firms," Working Paper Research 32, National Bank of Belgium.
    8. Erkki Koskela & Rune Stenbacka, 2000. "Agency Cost of Debt and Lending Market Competition: Is there a Relationship?," CESifo Working Paper Series 274, CESifo Group Munich.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • L0 - Industrial Organization - - General
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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