 Optimal contract theory with time-inconsistent preferencesHong Li, Congming Mu and Jinqiang Yang Economic Modelling, 2016, vol. 52, issue PB, 519-530 Abstract: This paper incorporates managers' time-inconsistent preferences into the classical DeMarzo and Sannikov (2006) contract model to study corresponding impacts on the optimal contract, corporate financial policies, and the optimal capital structure. The extended model shows that the impatience of the time-inconsistent agent has positive effects on the optimal payout decision which is opposite to DeMarzo and Sannikov (2006) and consequently provides a guideline to tailor the contract between investors and the agent. It also shows in the optimal capital structure, the total debt capacity shrinks with the degree of the agent's time inconsistency, and the long-term one shrinks more. In addition, our model predicts that the agent's time inconsistency not only imposes significant limits on the use of long-term debt but also has great effects on firms' capital structures. Thus our finding can potentially explain observed cross-sectional differences in firms' capital structures. Keywords: Time-inconsistent preferences; Principal–agent; Firm payout; Financial implementation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:52:y:2016:i:pb:p:519-530 DOI: 10.1016/j.econmod.2015.09.032 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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