Dynamic agency and the q theory of investment

Zhiguo He (), Neng Wang, Mike Fishman and Peter DeMarzo
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Mike Fishman: Northwestern University;

No 1070, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: been profitable, agency concerns are less severe, and the firm is growing rapidly. To study the effect of serial correlation of productivity shocks on investment and firm dynamics, we extend our model to allow the firm’s output price to be stochastic. We show that, in contrast to static agency models, the agent’s compensation in the optimal dynamic contract will depend not only on the firm’s past performance, but also on output prices, even though they are beyond the agent’s control. This dependence of the agent’s compensation on exogenous output prices (for incentive reasons) further feeds back on the firm’s investment, and provides a channel to amplify and propagate the response of investment to output price shocks via dynamic agency.

Date: 2008
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Journal Article: Dynamic Agency and the q Theory of Investment (2012)
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