A Mechanism Design Model of Firm Dynamics: The Case of Limited Commitment

Rui Li, Dana Kiku and Hengjie Ai
Additional contact information
Rui Li: University of Massachusetts Boston
Dana Kiku: University of Ilinois
Hengjie Ai: University of Minnesota

No 855, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We present a general equilibrium-mechanism design model with two-sided limited commitment that accounts for the observed heterogeneity in firms’ investment, payout and CEO-compensation policies. In the model, shareholders cannot commit to holding negative net present value projects, and managers cannot commit to compensation plans that yield life-time utility lower than their outside options. Firms operate identical constant return to scale technologies with i.i.d. productivity growth. Consistent with the data, the model endogenously generates a power law in firm size and a power law in CEO compensation. We also show that the model is able to quantitatively explain the observed negative relationship between firms' investment rates and size, the positive relationship between firms' size and their dividend and CEO payout, as well as variation of firms' investment and payout policies across both size and age.

Date: 2014
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2014/paper_855.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:855

Access Statistics for this paper

More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().