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Dynamic Agency with Renegotiation and Managerial Tenure

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  • Florin c{S}abac

    (Department of Accounting and Management Information Systems, School of Business, University of Alberta, Edmonton, Alberta T6G 2R6, Canada)

Abstract

This paper proves the renegotiation-proofness principle for a dynamic LEN (linear contracts, exponential utility, normal distributions) model and examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated. In addition to providing a general solution to a multiperiod agency problem with serially correlated performance measures, this paper characterizes optimal managerial tenure/turnover policies as a function of the time-series properties of performance measures. With negatively correlated performance measures, the principal prefers longer managerial tenure, and no turnover is optimal. With positively correlated performance measures, absent a switching cost, turnover every period is optimal. In the presence of a fixed switching cost, interior optimal turnover policies exist if the performance measures are positively correlated. Switching costs are necessary, but not sufficient for interior optimal tenure. The optimal turnover policies present an alternative to theories of performance-driven managerial turnover and are consistent with evidence that a majority of managerial turnovers are (age-related) normal retirements.

Suggested Citation

  • Florin c{S}abac, 2007. "Dynamic Agency with Renegotiation and Managerial Tenure," Management Science, INFORMS, vol. 53(5), pages 849-864, May.
    • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:5:p:849-864
    DOI: 10.1287/mnsc.1060.0638
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