 Agency Costs, Net Worth, and Endogenous Business FluctuationsNo 400, 2006 Meeting Papers from Society for Economic Dynamics Abstract: The role of credit market imperfections as source of amplification and persistence of temporary exogenous shocks to the economy is widely accepted in the literature. Little attention has been paid to the possibility that credit frictions also generate instability. This paper proposes a theory of business fluctuations where the source of the oscillatory dynamics is an agency problem between investors and entrepreneurs. A central tenet of the theory is that investment decisions depend upon entrepreneurs' incentive to exert effort ex-ante and investors' incentive to control entrepreneurs ex-post. This double-sided incentive is used to show how recessions prevent entrepreneurs from engaging in unproductive activity and booms facilitate the adoption of unproductive arrangements, so that recessions sow the seeds for a subsequent boom while economic expansions create the conditions for their own demise. Keywords: Credit frictions; Double Moral Hazard; Business Cycles; Endogenous Fluctuations (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:400 Access Statistics for this paper More papers in 2006 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. |
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