Why do reputable agents work for safer firms?

Fei Li, Masako Ueda*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Safer firms receive funding from reputable venture capitalists and offer new securities underwritten by reputable investment banks. We offer a new explanation for these facts employing a moral-hazard model in which a firm and an agent are matched endogenously. More reputable agent's effort has a greater impact on output. Safer firm's output reflects the agent's hidden effort more accurately and therefore the agent's pay scheme tied with the output powerfully motivates her to exert effort. In equilibrium, a safer firm should be matched with a reputable agent since this combination allows to maximize effort of the reputable agent.

Original languageEnglish (US)
Pages (from-to)2-12
Number of pages11
JournalFinance Research Letters
Volume6
Issue number1
DOIs
StatePublished - Mar 1 2009

Keywords

  • Matching
  • Moral hazard
  • Project risks

ASJC Scopus subject areas

  • Finance

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