Agency and Investment with Triggered Time-Inconsistent Preference

Individual’s time preference may be influenced by a variety of factors such as economic conditions. In this paper, we consider the time inconsistent preference triggered by the switches of firm’s profitability state and apply it to the model of dynamic agency and the q theory of investment. And we investigate effects of triggered time-inconsistent preference on the optimal contract between investors and manager, Tobin’s q and firm investment. We find that the time-inconsistent preference increases the investors’ value loss in both regimes. As the manager’s time-inconsistent preference, the contract should make more adjustment of the manager’s continuation payoff conditional on a jump from one state to the alternative state. Meanwhile, the firm prefers paying the manager with cash earlier due to the triggered time-inconsistent preference. It also shows that the manager’s time inconsistency induces underinvestment and reduces the sensitivity of investment, firm’s average q and marginal q in both regimes