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Agency and the Pace of Adoption of New Techniques

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 technological advance in a dynamic agency theoretic model. A firm which is financed by outside shareholders but run by managers has the prospect of a process innovation which arrives stochastically. Adopting the innovation requires firing old management and hiring new with skills appropriate for the new technique. We show that subgame perfect equilibria in this game can be of two types. In “entrenchment” equilibrium once the new technique has been announced old style management raises their dividend payout sufficiently to preempt the innovation. In “maximum rent extraction” equilibrium’ managers are unable or unwilling to match the impending productivity improvement and instead respond by increasing their perquisites for the remaining time of their tenure. We show that both equilibria involve several types of inefficiencies and can result in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.

Résumé

Résumé

Nous étudions la relation entre le contrat financier et le rythme de l’avance technologique dans un modèle théorique dynamique de l’agence. Une firme, financée par des actionnaires externes mais gérée par des cadres-dirigeants, a la possibilité de connaître un processus d’innovation qui survient de façon stochastique. L’adoption d’une innovation nécessite de licencier les dirigeants et d’en embaucher de nouveaux ayant les qualifications en adéquation avec la nouvelle technique. Nous montrons que, dans ce jeu, les équilibres parfaits de sous-jeux peuvent être de deux types: à l’équilibre « blocage », une fois que la nouvelle technique a été annoncée, les dirigeants en place augmentent le dividende payé de manière à empêcher l’innovation d’être mise en oeuvre. À l’équilibre « extraction maximale de la rente » les dirigeants sous menace de licenciement réagissent en augmentant leurs privilèges jusqu’à la fin de leurs fonctions dans l’organisation. Nous montrons que les deux équilibres comportent plusieurs types d’inefficiences et qu’ils peuvent aboutir à un sous-investissement dans les projets à valeur actuelle nette positive. Nous discutons, pour finir, du rôle que peut avoir l’innovation financière afin de reduire ces inefficiences.

Keywords

ContractCorporate financeInnovationGovernanceG30G32ContratFinance d’entrepriseInnovationGouvernanceG30G32
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 : [email protected] and Nyborg : [email protected]

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