Recent empirical studies conclude that small firms have higher but more variable growth rates than large firms. To explore the effect of this size-dependence regularity on moral hazard and investment, we develop a continuous-time agency model with time-varying firm size. Firm size is a diffusion...

In this chapter we study dynamic incentive models in which risk sharing is endogenously limited by the presence of informational or enforcement frictions. We comprehensively overview one of the most important tools for the analysis such problems—the theory of recursive contracts. Recursive...