Firm Size and Compensation Dynamics with Risk Aversion and Persistent Private Information

Gerard Maideu-Morera

No 24-1535, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: I study a dynamic cash flow diversion model between a risk neutral lender and a risk averse entrepreneur who has persistent private information about the firm’s productivity. In the optimal contract, the firm’s size is always distorted downwards and its distortions inherit the autoregressive properties of the type process. The entrepreneur’s compensation is smoothed and decoupled from the firm size dynamics. These results contrast those of equivalent models with risk neutrality. I use numerical simulations to study a quasi-implementation with simpler contracts, which highlights that this class of models is unable to generate realistic firm size and equity share dynamics simultaneously.

Keywords: Firm dynamics; financing constraints; recursive contracts; persistent private information (search for similar items in EconPapers)
JEL-codes: D82 G32 L14 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ent and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129337

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