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Dynamic agency and the q theory of investment

Author

Listed:
  • Zhiguo He

    (Northwestern University;)

  • Neng Wang

    (Columbia University)

  • Mike Fishman

    (Northwestern University;)

  • Peter DeMarzo

    (Stanford University;)

Abstract

been profitable, agency concerns are less severe, and the firm is growing rapidly. To study the effect of serial correlation of productivity shocks on investment and firm dynamics, we extend our model to allow the firm’s output price to be stochastic. We show that, in contrast to static agency models, the agent’s compensation in the optimal dynamic contract will depend not only on the firm’s past performance, but also on output prices, even though they are beyond the agent’s control. This dependence of the agent’s compensation on exogenous output prices (for incentive reasons) further feeds back on the firm’s investment, and provides a channel to amplify and propagate the response of investment to output price shocks via dynamic agency.

Suggested Citation

  • Zhiguo He & Neng Wang & Mike Fishman & Peter DeMarzo, 2008. "Dynamic agency and the q theory of investment," 2008 Meeting Papers 1070, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:1070
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    References listed on IDEAS

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