Working Paper: CEPR ID: DP2130
Authors: Philippe Aghion; Mathias Dewatripont; Patrick Rey
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.
Keywords: competition; agency; technological growth; satisficing behaviour
JEL Codes: E0; L0; O0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the need for outside finance (G32) | Decrease in managerial effort (D29) |
| Increase in the need for outside finance (G32) | Increase in managerial effort (D29) |
| Low levels of outside finance (G29) | Decrease in managerial incentives to exert effort (M52) |
| High levels of outside finance (G19) | Increase in managerial effort (D29) |
| Increase in the need for outside finance (G32) | Commitment to higher managerial effort (D29) |
| Outside finance levels (low to high) (G29) | Nonmonotonic relationship in managerial effort (D29) |