The Case of the Errant Executive : Management, Control and Firm Size in Corporate Cheating
Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside shareholders, attempts to control the manager through compensation contracts and dismissal threats Since compensation determines the manager’s incentive to cheat, firms competing for outside capital publicly announce their managerial contracts. However, secret renegotiation between firm and manager is still possible: so outsiders guard against being cheated by limiting their total stake in any firm. This imposes a credibility constraint on firm size, providing a rationale for the shape of long-run cost curves. Given this limit on outside funds, the minimum size requirement for enterprises to become operational and the ability to pay managers enough to ensure honesty both set a floor to the personal wealth required to enter entrepreneurship. Thus, we endogenize entry into industry, establish a unique equilibrium for any distribution of wealth, and characterize different equilibria. We also explain features of poor countries like dominance of family firms, moral hazard induced vicious circles that retard industrialization and the stimulus that inequality may provide to industrial development.
|Date of creation:||Sep 2005|
|Date of revision:|
|Publication status:||Published in SMU Economics and Statistics Working Paper Series|
|Contact details of provider:|| Postal: |
Phone: 65-6828 0832
Fax: 65-6828 0833
Web page: http://www.economics.smu.edu.sg/
More information through EDIRC
|Order Information:|| Email: |
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.:
- Denis Gromb, 2000.
"Public Trading and Private Incentives,"
FMG Discussion Papers
dp347, Financial Markets Group.
- Tirole, Jean, 1996.
"A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality),"
Review of Economic Studies,
Wiley Blackwell, vol. 63(1), pages 1-22, January.
- Tirole, Jean, 1994. ""A Theory of Collective Reputations" with Applications to the Persistence of Corruption and to Firm Quality," IDEI Working Papers 38, Institut d'Économie Industrielle (IDEI), Toulouse.
- Tirole, J., 1993. "A Theory of Collective Reputations with Applications to the Persistence of Corruption and to Firm Quality," Working papers 93-13, Massachusetts Institute of Technology (MIT), Department of Economics.
- Joh, Sung Wook, 2003. "Corporate governance and firm profitability: evidence from Korea before the economic crisis," Journal of Financial Economics, Elsevier, vol. 68(2), pages 287-322, May.
- Brishti Guha, 2005.
"Honesty and Intermediation: Corporate Cheating, Auditor Involvement and the Implications for Development,"
18-2005, Singapore Management University, School of Economics.
- Brishti Guha, 2005. "Honesty and Intermediation : Corporate Cheating, Auditor Involvement and the Implications for Development," Microeconomics Working Papers 22426, East Asian Bureau of Economic Research.
- Lal, Deepak & Myint, H., 1998. "The Political Economy of Poverty, Equity and Growth: A Comparative Study," OUP Catalogue, Oxford University Press, number 9780198294320, March.
- Galor, Oded & Zeira, Joseph, 1988.
"Income Distribution and Macroeconomics,"
51644, University Library of Munich, Germany, revised 01 Sep 1989.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
- Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
- Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
- Abhijit V. Banerjee & Andrew F. Newman, 1990.
"Occupational Choice and the Process of Development,"
911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
When requesting a correction, please mention this item's handle: RePEc:siu:wpaper:16-2005. 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: (QL THor)
If references are entirely missing, you can add them using this form.