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The impact of firm size on dynamic incentives and investment
Author(s) -
Chi ChangKoo,
Choi Kyoung Jin
Publication year - 2017
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12171
Subject(s) - moral hazard , incentive , volatility (finance) , investment (military) , principal–agent problem , economics , microeconomics , monetary economics , agency (philosophy) , industrial organization , econometrics , finance , corporate governance , politics , political science , law , philosophy , epistemology
Recent studies conclude that small firms have higher but more variable growth rates than large firms. To explore how this empirical regularity affects moral hazard and investment, we develop an agency model with a firm size process having two features: the drift is controlled by the agent's effort and the principal's investment decision, and the volatility is proportional to the square root of size. The firm improves on production efficiency as it grows, and wages are back‐loaded when size is small but front‐loaded when it is large. Furthermore, there is underinvestment in a small firm but overinvestment in a large firm.