The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating

Brishti Guha ()

Microeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: Firm insiders a manager and a board face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside shareholders, attempts to control the manager through compensation contracts and dismissal threats Since compensation determines the managers incentive to cheat, firms competing for outside capital publicly announce their managerial contracts. However, secret renegotiation between firm and manager is still possible : so outsiders guard against being cheated by limiting their total stake in any firm. This imposes a credibility constraint on firm size, providing a rationale for the shape of long-run cost curves. Given this limit on outside funds, the minimum size requirement for enterprises to become operational and the ability to pay managers enough to ensure honesty both set a floor to the personal wealth required to enter entrepreneurship. Thus, we endogenize entry into industry, establish a unique equilibrium for any distribution of wealth, and characterize different equilibria. We also explain features of poor countries like dominance of family firms, moral hazard induced vicious circles that retard industrialization and the stimulus that inequality may provide to industrial development.

Keywords: moral hazard; firm size; managerial compensation; repeated games (search for similar items in EconPapers)
JEL-codes: D82 L21 M52 O11 (search for similar items in EconPapers)
Date: 2005-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.eaber.org/node/22428 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 301 [REDIRECT LOOP] Moved Permanently (http://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428 [301 Moved Permanently]--> https://www.eaber.org/node/22428)

Related works:
Working Paper: The Case of the Errant Executive: Management, Control and Firm Size in Corporate Cheating (2005)
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:eab:microe:22428

Access Statistics for this paper

More papers in Microeconomics Working Papers from East Asian Bureau of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Shiro Armstrong ().