Endogenous agency problems and the dynamics of rents

Abstract

While potentially more productive, more complex tasks request more e¤ort, generating larger agency rents. Agents therefore prefer to acquire complex skills, to earn large rents. In our overlapping generations model, their ability to do so is kept in check by competition with predecessors. Old agents, however, are imperfect substitutes for young ones, because the latter are easier to incentivize, thanks to longer horizons. This reduces competition between generations, enabling young managers to go for larger complexity than their predecessors. Consequently, equilibrium complexity and rents gradually increase, especially when agents are patient and turnover limited, so that compensation deferral is very useful to mitigate moral hazard.

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Reference

Bruno Biais, and Augustin Landier, “Endogenous agency problems and the dynamics of rents”, TSE Working Paper, n. 13-423, May 2013, revised July 2018.