We develop a firm-dynamics model with moral hazard, which arises because some productivity shocks are privately observed by firm managers only. We characterize the optimal contract and its implications for firm size, growth, and managerial pay-performance sensitivity, which allow us toquantify...

We extend the neoclassical investment model Hayashi (1982) to allow for limited commitment on compensation contracts. We consider three types of limited commitment: i) managers cannot commit to compensation contracts that provide lower continuation utility than their outside options; ii)...

We present a dynamic general equilibrium model with heterogeneous firms. Owners of the firms delegate investment decisions to managers, whose consumption and investment are private information. We solve the optimal incentive compatible contracts and characterize the implied firm dynamics....

We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied firm dynamics. Risk sharing requires...