Cash and Dynamic Agency
Event details
| Date | 19.09.2014 |
| Hour | 10:30 › 12:00 |
| Speaker | Barney HARTMAN-GLASER (UCLA) |
| Location | |
| Category | Conferences - Seminars |
We present an agency model of cash dynamics within a firm. An investor contracts with a manager to operate a firm but faces two key frictions in doing so. First, the manager can divert cash for her own consumption by underreporting cash flow to the investor. Second, The investor has limited liability and cannot costly transfer cash into the firm to cover cash flow shortfalls. This second friction implies that the investor must allow cash to accumulate within the firm. However, the first friction implies that the firm cannot maintain too high a cash stock, lest the manager divert. In some cases, the optimal contract can be implemented via performance sensitive debt. In all cases, the payouts to the investors are given by a rate per unit of time, while payouts to the manager are lumpy. Conditional on making payouts to the investors, the firm pays the investor at higher rate the lower the cash balance. Cash constrained firms may choose to begin operations by ceding more surplus to the manager to decrease the probability of liquidation.
Links
Practical information
- Expert
- Free