Working Paper: NBER ID: w16490
Authors: Randall Morck; Bernard Yeung
Abstract: Economics has firms maximizing value and people maximizing utility, but firms are run by people. Agency theory concerns the mitigation of this internal contradiction in capitalism. Firms need charters, regulations and laws to restrain those entrusted with their governance, just as economies need constitutions and independent judiciaries to restrain those entrusted with government. Agency problems distort capital allocation if corporate insiders are inefficiently selected or incentivized, and this hampers economic growth absent a legal system with appropriate constraints. However, political economy problems and agency problems in corporations may reinforce each other, compromising the quality of both corporate governance and government.
Keywords: agency problems; corporate governance; capital allocation; economic growth
JEL Codes: B53; G28; G34; N20; P1; P12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agency problems (G34) | capital allocation distortion (D61) |
| capital allocation distortion (D61) | economic growth (O49) |
| poor governance (D73) | suboptimal economic performance (P47) |
| higher agency costs (G39) | inefficient resource allocation (D61) |
| inefficient resource allocation (D61) | social costs on the economy (D62) |
| effective corporate governance (G38) | credibility of corporate insiders (G34) |
| credibility of corporate insiders (G34) | maximizing net present values (NPVs) (G31) |
| maximizing net present values (NPVs) (G31) | share prices (G12) |
| share prices (G12) | access to outside capital (O36) |
| access to outside capital (O36) | economic growth (O49) |