Managerial Effort, Agency, and Industrial Evolution

Esra Durceylan-Kaygusuz
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Esra Durceylan-Kaygusuz: Bilkent University Department of Economics

No 589, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: Simulations of the estimated model characterize managers' effort choices in response to increased product market competition. In the agency model, heightened competitive pressures that cause managerial effort to increase by 23 percent for the lowest productivity firms, which are most likely to exit. However, among high productivity firms, managers decrease their effort levels by 2 percent. In the proprietorship model, managerial effort decreases with heightened competitive pressures for almost all firms, and it does so most dramatically for the low productivity firms. These findings reflect two forces. First, when loss of managerial rents is not an issue, heightened competitive pressures reduce the return to effort. Second, when owners do not internalize the loss of rents that managers suffer in the event of exit, managers use their effort level to try to control exit probabilities. The latter force is at work in the agency model but not the proprietorship model, and it dominates among low productivity firms, which are relatively likely to exit.

Date: 2009
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