Center for Economic Research, Department of Economics, University of Minnesota
Abstract
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
