Agency and the Pace of Adoption of New Techniques

Ronald W. Anderson and Kjell Nyborg
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Ronald W. Anderson: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2002027, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We study the relation of financial contracting and the pace of technological advance in a dynamic agency theoretic model. A firm which is financed by outside shareholders but run by managers has the prospect of a process innovation which arrives stochastically. Adopting the innovation requires firing old management and hiring new with skills appropriate for the new technique. We show that subgame perfect equilibria in this game can be of two types. In "entrenchment" equilibrium once the new technique has been announced old style management raises their dividend payout sufficiently to preempt the innovation. In "maximum rent extraction" equilibrium' managers are unable or unwilling to match the impending productivity improvement and instead respond by increasing their perquisites for the remaining time of their tenure. We show that both equilibria involve several types of inefficiencies and can resuit in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.

Keywords: Contract; Corporate finance; Innovation; Governance (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Pages: 18
Date: 2002-06-01
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Citations: View citations in EconPapers (1)

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Journal Article: Agency and the Pace of Adoption of New Techniques (2002)
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