Agency Costs, Firm Behaviour and the Nature of Competition

Philippe Aghion, Mathias Dewatripont and Patrick Rey

No 2130, CEPR Discussion Papers from Centre for Economic Policy Research

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: Agency; Competition; Satisficing Behaviour (search for similar items in EconPapers)
JEL-codes: E0 L0 O0 (search for similar items in EconPapers)
Date: 1999-04
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Citations: View citations in EconPapers (7)

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Working Paper: Agency Costs, Firm Behavior and the Nature of Competition (2000)
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