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)...