Growth, Selection and Appropriate Contracts

Alessandra Bonfiglioli (alessandra.bonfiglioli@unibg.it) and Gino Gancia

Review of Economic Dynamics, 2014, vol. 17, issue 1, 21-38

Abstract: We study a dynamic model where growth requires both long-term investment and the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk of being replaced choose a sub-optimally low level of long-term investment. This generates a trade-off between selection and investment that has implications for the choice of contractual relationships and institutions. Our analysis shows that rigid long-term contracts sacrificing managerial selection may prevail at early stages of economic development and when heterogeneity in ability is low. As the economy grows, however, knowledge accumulation increases the return to talent and makes it optimal to adopt flexible contractual relationships, where managerial selection is implemented even at the cost of lower investment. Measures of investor protection aimed at limiting the bargaining power of managers improve selection under short-term contracts. Given that knowledge accumulation raises the value of selection, the optimal level of investor protection increases with development. (Copyright: Elsevier)

Keywords: Information; Selection; Appropriate contracts; Development; Growth; Appropriate institutions; Investor Protection (search for similar items in EconPapers)
JEL-codes: D8 O40 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2013.03.001
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

Related works:
Working Paper: Growth, Selection and Appropriate Contracts (2015)
Working Paper: Growth, Selection and Appropriate Contracts (2012)
Working Paper: Growth, selection and appropriate contracts (2012)
Working Paper: Growth, Selection and Appropriate Contracts (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:11-157

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/
red@elsevier.com

DOI: 10.1016/j.red.2013.03.001

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann (chuichuiche@gmail.com).