Renegotiation-proof contracting, disclosure, and incentives for efficient investment

Nina Baranchuk, Philip Dybvig and Jun Yang

Journal of Economic Theory, 2010, vol. 145, issue 5, 1805-1836

Abstract: Disclosure by firms would seem to reduce investment inefficiency by reducing informational asymmetry. However, the impact of disclosure is endogenous and depends on incentives within the firm. Given optimal renegotiation-proof contracts, disclosing only accepted contracts does not solve the Myers-Majluf problem. What solves the problem is having either full transparency of all compensation negotiations or, more reasonably, additional forward-looking announcements. The model is robust to renegotiation in equilibrium, the order of moves, and moral hazard. The analysis illuminates disclosure regulation: forward-looking disclosure is beneficial when the manager's contract is optimal and induces truth-telling.

Keywords: Optimal; contracting; Renegotiation-proofness; Compensation; disclosure; Forward-looking; announcement (search for similar items in EconPapers)
Date: 2010
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