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Growth, selection and appropriate contracts

Alessandra Bonfiglioli () and Gino Gancia ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study a dynamic model where growth requires both long-term investment and the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk of being replaced choose a sub-optimally low level of long-term investment. This generates a trade-off between selection and investment that has implications for the choice of contractual relationships and institutions. Our analysis shows that rigid long-term contracts sacrificing managerial selection may prevail at early stages of economic development and when heterogeneity in ability is low. As the economy grows, however, knowledge accumulation increases the return to talent and makes it optimal to adopt flexible contractual relationships, where managerial selection is implemented even at the cost of lower investment. Measures of investor protection aimed at limiting the bargaining power of managers improve selection under short-term contract. Given that knowledge accumulation raises the value of selection, the optimal level of investor protection increases with development.

Keywords: information; selection; appropriate contracts; development; growth; appropriate institutions; investor protection. (search for similar items in EconPapers)
JEL-codes: D8 O40 (search for similar items in EconPapers)
Date: 2009-07, Revised 2012-07
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Related works:
Journal Article: Growth, Selection and Appropriate Contracts (2014) Downloads
Working Paper: Growth, Selection and Appropriate Contracts (2012) Downloads
Working Paper: Growth, Selection and Appropriate Contracts (2012) Downloads
Working Paper: Growth, Selection and Appropriate Contracts (2011) Downloads
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