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A Unified Model of Firm Dynamics with Limited Commitment and Assortative Matching
Author(s) -
AI HENGJIE,
KIKU DANA,
LI RUI,
TONG JINCHENG
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12980
Subject(s) - matching (statistics) , salient , commit , economics , compensation (psychology) , investment (military) , dividend , microeconomics , econometrics , dynamics (music) , distribution (mathematics) , computer science , mathematics , psychology , mathematical analysis , statistics , physics , finance , database , artificial intelligence , politics , political science , psychoanalysis , acoustics , law
We develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, neither firms nor managers can commit to arrangements that yield lower payoffs than their outside options, which are microfounded by the equilibrium conditions in a matching market. The model endogenously generates power laws in firm size and CEO compensation, and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time‐series dynamics and the cross‐sectional distribution of firm investment, dividend payout, and CEO compensation.