Endogenous Asset Specificity in a Principal-Agent Model: An Interpretation of Managerial Myopia

This paper studies the implications of an agency problem for the optimal asset specificity of a firm. The main result is that there exists a region in the parameter space such that the optimum in the presence of an agency problem has less specific assets and more frequent liquidation than in the absence of an agency problem. This result provides an interpretation of so-called ,managerial myopia. That is, the firm seems to be so concerned about the liquidation value of its investment that it is willing to sacrifice the expected output of its investment by using a less specific asset

An Aggregate Model of Firm Specific Capital with and without Commitment

This paper studies the implications of an agency problem on the equilibrium outcome of an intertemporal model. The model considered is a two-period lived overlapping generations model with an aggregate productivity shock. In each generation, a subset of the agents, the entrepreneurs, choose the asset specificity of their projects. An agency problem exists because the entrepreneurs cannot commit to supplying their human capital which is essential to the project. I compare equilibria with and without commitment. The main result is that in the long run, the equilibrium without commitment has lower asset specificity and per capita output, and the productivity shocks have more lasting effects. However, it need not have larger aggregate fluctuations