Citation

Discussion Paper Details

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Title: Agency Costs, Firm Behaviour and the Nature of Competition

Author(s): Philippe Aghion, Mathias Dewatripont and Patrick Rey

Publication Date: April 1999

Keyword(s): Agency, Competition and Satisficing Behaviour

Programme Area(s): Financial Economics and Industrial Organization

Abstract: This paper develops an agency model in which firms can influence their own incentives to provide a non-contractible effort by contracting on other variables (e.g. by committing themselves to some verifiable investment). In such a model the firms' need for outside finance is shown to interact with their product market behavior in a non-monotonic way; for low levels of outside finance a rise in the need for outside finance reduces the manager's incentive to provide effort; but for high initial levels of outside finance a rise in the need for outside finance requires a commitment to higher effort which in turn is achieved through the contractible investment variables. This non-monotonicity has major implications for firm behavior, both when responding to demand shocks or when reacting to a change in the competitive environment.

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Bibliographic Reference

Aghion, P, Dewatripont, M and Rey, P. 1999. 'Agency Costs, Firm Behaviour and the Nature of Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2130