 Agency and investment with triggered time-inconsistent preferencesWenli Huang, Wenqiong Liu, Dongfang Wang and Ying Wang The North American Journal of Economics and Finance, 2023, vol. 68, issue C Abstract: Individual’s time preferences may be influenced by a variety of factors such as economic conditions. In this paper, we consider the time inconsistent preferences triggered by the switches in firm’s profitability states and apply them to the model of dynamic agency and to the q theory of investment. And we investigate effects of triggered time-inconsistent preferences on the optimal contract between investors and manager, Tobin’s q and firm investment. We find that time-inconsistent preferences increase the value loss of investors in both states. Owning to the manager’s time-inconsistent preferences, the contract should make more adjustments for the manager’s continuation payoff conditional on a jump from one state to the alternative state. Meanwhile, the firm prefers paying the manager with cash in advance due to the triggered time-inconsistent preferences. It also shows that the manager’s time inconsistency induces underinvestment and reduces the sensitivity of investment, firm’s average q and marginal q in both states. Keywords: Investment; Optimal contract; Time-inconsistent preferences; Principal–agent problem (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:68:y:2023:i:c:s1062940823001146 DOI: 10.1016/j.najef.2023.101991 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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