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Renegotiation-proof contracting, disclosure, and incentives for efficient investment

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  • Baranchuk, Nina
  • Dybvig, Philip H.
  • Yang, Jun

Abstract

Disclosure by firms would seem to reduce investment inefficiency by reducing informational asymmetry. However, the impact of disclosure is endogenous and depends on incentives within the firm. Given optimal renegotiation-proof contracts, disclosing only accepted contracts does not solve the Myers-Majluf problem. What solves the problem is having either full transparency of all compensation negotiations or, more reasonably, additional forward-looking announcements. The model is robust to renegotiation in equilibrium, the order of moves, and moral hazard. The analysis illuminates disclosure regulation: forward-looking disclosure is beneficial when the manager's contract is optimal and induces truth-telling.

Suggested Citation

  • Baranchuk, Nina & Dybvig, Philip H. & Yang, Jun, 2010. "Renegotiation-proof contracting, disclosure, and incentives for efficient investment," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1805-1836, September.
    • Handle: RePEc:eee:jetheo:v:145:y:2010:i:5:p:1805-1836
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    References listed on IDEAS

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