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Agency and the Pace of Adoption of NewTechniques

Published online by Cambridge University Press:  17 August 2016

Ronald W. Anderson  and
Kjell G. Nyborg
Ronald W. Anderson
Affiliation:
London School of Economics and Political Science and IRES Université catholique de Louvain
Kjell G. Nyborg
Affiliation:
London Business School and CEPR
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Summary

We study the relation of financial contracting and the pace of technologicaladvance in a dynamic agency theoretic model. A firm which is financed byoutside shareholders but run by managers has the prospect of a processinnovation which arrives stochastically. Adopting the innovation requiresfiring old management and hiring new with skills appropriate for the newtechnique. We show that subgame perfect equilibria in this game can be oftwo types. In “entrenchment” equilibrium once the new technique has beenannounced old style management raises their dividend payout sufficiently topreempt the innovation. In “maximum rent extraction” equilibrium’ managersare unable or unwilling to match the impending productivity improvement andinstead respond by increasing their perquisites for the remaining time oftheir tenure. We show that both equilibria involve several types ofinefficiencies and can result in underinvestment in positive NPV projects.We discuss the role of financial innovation in reducing the inefficienciesidentified.

Résumé

Résumé

Nous étudions la relation entre le contrat financier et le rythme del’avance technologique dans un modèle théorique dynamique de l’agence. Unefirme, financée par des actionnaires externes mais gérée par descadres-dirigeants, a la possibilité de connaître un processus d’innovationqui survient de façon stochastique. L’adoption d’une innovation nécessite delicencier les dirigeants et d’en embaucher de nouveaux ayant lesqualifications en adéquation avec la nouvelle technique. Nous montrons que,dans ce jeu, les équilibres parfaits de sous-jeux peuvent être de deuxtypes: à l’équilibre « blocage », une fois que la nouvelle technique a étéannoncée, les dirigeants en place augmentent le dividende payé de manière àempêcher l’innovation d’être mise en oeuvre. À l’équilibre « extractionmaximale de la rente » les dirigeants sous menace de licenciement réagissenten augmentant leurs privilèges jusqu’à la fin de leurs fonctions dansl’organisation. Nous montrons que les deux équilibres comportent plusieurstypes d’inefficiences et qu’ils peuvent aboutir à un sous-investissementdans les projets à valeur actuelle nette positive. Nous discutons, pourfinir, du rôle que peut avoir l’innovation financière afin de reduire cesinefficiences.

Keywords

ContractCorporate financeInnovationGovernanceG30G32ContratFinance d’entrepriseInnovationGouvernanceG30G32

Information

Type
III. Finance
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 68 , Special Issue 1-2: The New Economy: Implications and Viability , 2002 , pp. 203 - 220
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2002 

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Footnotes

*

We have benefitted from comments of participants of the “New Economy : Implications and Viability” conference at the University of Metz, April 2001. Responsibility for all errors and views expressed is our own. This research has been supported by the Belgian French Community,Action de Recherche Concertée, 99/04-235. Anderson :r.w.anderson@lse.ac.uk and Nyborg : knyborg@london.edu

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