Neoclassical Investment with Moral Hazard

João Ejarque

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper takes the neo classical model of the investment decision of the firm and adds a Moral Hazard problem to it. The Moral Hazard problem, which arises due to the separation between ownership and control, induces empirical results from sample splits, which are usually interpreted as a sign of financial constraints. These results are a consequence of the departure from the benchmark linear framework of the Neoclassical model. In short, curvature can be a result of either adjustment costs, credit constraints, or of a Moral Hazard problem if the manager has a concave utility function. In addition, the Moral Hazard problem is greatly exacerbated in the presence of a compensation structure with limited liability. This induces volatility in the firm, and depending on the model parameters can generate large losses for the firm coupled with generous compensation outcomes for management.

JEL-codes: E22 G34 (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bportugal.pt/sites/default/files/anexos/papers/wp200417.pdf

Related works:
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:ptu:wpaper:w200417

Access Statistics for this paper

More papers in Working Papers from Banco de Portugal, Economics and Research Department Contact information at EDIRC.
Bibliographic data for series maintained by DEE-NTD ().