The Impact of Firm Size on Dynamic Incentives and Investment
Chang Koo Chi () and
Kyoung Jin Choi
MPRA Paper from University Library of Munich, Germany
Recent studies conclude that small firms have higher but more variable growth rates than large firms. To explore how this empirical regularity affects moral hazard and investment, we develop an agency model with a firm size process having two features: the drift is controlled by the agent's effort and the principal's investment decision, and the volatility is proportional to the square root of size. The firm improves on production efficiency as it grows, and wages are back-loaded when size is small but front-loaded when it is large. Furthermore, there is underinvestment in a small firm but overinvestment in a large firm.
Keywords: Time-Varying Firm Size; Size-Dependence Regularity; Firm Size Effect; Dynamic Moral Hazard; Investment (search for similar items in EconPapers)
JEL-codes: D82 D86 D92 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-ent, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Published in Rand Journal of Economics 1.48(2017): pp. 147-177
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/80867/1/MPRA_paper_80867.pdf original version (application/pdf)
Journal Article: The impact of firm size on dynamic incentives and investment (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:80867
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().