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Topic
A Unified Model of Firm Dynamics With Limited Commitment and Assortative Matching
Resource type
Authors/contributors
- Ai, Hengjie (Author)
- Kiku, Dana (Author)
- Li, Rui (Author)
- Tong, Jincheng (Author)
Title
A Unified Model of Firm Dynamics With Limited Commitment and Assortative Matching
Abstract
We develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, neither firms nor managers can commit to arrangements that yield lower payoffs than their outside options, which are microfounded by the equilibrium conditions in a matching market. The model endogenously generates power laws in firm size and CEO compensation, and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time‐series dynamics and the cross‐sectional distribution of firm investment, dividend payout, and CEO compensation.
Publication
The Journal of Finance
Volume
76
Issue
1
Pages
317-356
Date
2021
Citation
Ai, H., Kiku, D., Li, R., & Tong, J. (2021). A Unified Model of Firm Dynamics With Limited Commitment and Assortative Matching. The Journal of Finance, 76, 317–356.
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