Dynamic agency and the q theory of investment
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.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
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.:
- Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
- Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007.
"Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications,"
Review of Economic Studies,
Oxford University Press, vol. 74(2), pages 345-390.
- Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," IDEI Working Papers 312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
- repec:bla:restud:v:74:y:2007:i:2:p:345-390 is not listed on IDEAS
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
- Russell W. Cooper & John C. Haltiwanger, 2006.
"On the Nature of Capital Adjustment Costs,"
Review of Economic Studies,
Oxford University Press, vol. 73(3), pages 611-633.
- Guillaume Plantin & Bruno Biais & Thomas Mariotti & Jean-Charles Rochet, 2004.
"Dynamic Security Design,"
GSIA Working Papers
2005-E5, Carnegie Mellon University, Tepper School of Business.
- Andrew Atkeson, 2010.
"International lending with moral hazard and risk of repudiation,"
Levine's Working Paper Archive
200, David K. Levine.
- Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
- Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
When requesting a correction, please mention this item's handle: RePEc:red:sed008:1070. 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: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.