 Ambiguity, limited commitment, and the q theory of investmentWei Wu, Yingjie Niu, Yaoyao Wu and Hongru Xu The North American Journal of Economics and Finance, 2022, vol. 60, issue C Abstract: We consider the principal (shareholders)-agent (manager) problem in connection with investment and CEO compensation under two types of limited commitment, where the principal worries about model uncertainty and exhibits ambiguity-averse with respect to the true probability. Consistent with maxmin criterion, a robust principal makes decisions under some endogenous worst case. In the case of limited commitment on the manager side, the firm invests less and average q and marginal q are always lowered in the presence of ambiguity. However, in the case of limited commitment on the shareholder side, ambiguity induces under-investment and over-investment simultaneously and has different implications for average q and marginal q. Moreover, the robust compensation contract features time-varying compensation no matter whether the limited commitment constraints bind or not, which is contrary to the conventional wisdom. Finally, the optimal sensitivity of continuation utility increases with ambiguity-aversion. Keywords: Ambiguity; Limited commitment; Investment; Compensation (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:ecofin:v:60:y:2022:i:c:s1062940822000018 DOI: 10.1016/j.najef.2022.101639 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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