Time-Inconsistent Boards and the Risk of Repeated Misconduct

This paper develops a simple model of corporate governance based on the concept of time-inconsistent misconduct. The model relaxes the standard rational choice assumption that corporate actors have time-consistent preferences and thus have perfect self-control; it therefore directly accounts for the behavioral economics literature findings that people routinely exhibit a preference for immediate gratification that can lead them to act in a dynamically inconsistent manner. I show that time inconsistent preferences can lead corporate actors to overconsume misconduct in the same manner that they overconsume other goods that provide them with immediate utility. Moreover, where complying with a legal rule requires corporate actors to incur immediate costs, a preference for immediate gratification can lead them to repeatedly procrastinate following through. Finally, the paper shows that managers can exploit the time-inconsistent preferences of board members to entrench themselves to a much greater degree than predicted by standard economic models