Ambiguity, limited commitment, and the q theory of investment

作者：Wu, Wei; Niu, Yingjie; Wu, Yaoyao^*; Xu, Hongru

来源：North American Journal of Economics and Finance, 2022, 60: 101639.

DOI：10.1016/j.najef.2022.101639

• Ambiguity
• Limited commitment
• Investment
• Compensation

We consider the principal (shareholders)-agent (manager) problem in connection with investment and CEO compensation under two types of limited commitment, where the principal worries about model uncertainty and exhibits ambiguity-averse with respect to the true probability. Consistent with maxmin criterion, a robust principal makes decisions under some endogenous worst case. In the case of limited commitment on the manager side, the firm invests less and average q and marginal q are always lowered in the presence of ambiguity. However, in the case of limited commitment on the shareholder side, ambiguity induces under-investment and over-investment simultaneously and has different implications for average q and marginal q. Moreover, the robust compensation contract features time-varying compensation no matter whether the limited commitment constraints bind or not, which is contrary to the conventional wisdom. Finally, the optimal sensitivity of continuation utility increases with ambiguity-aversion.

• 单位
  上海大学