MYOPIC INVESTMENT DECISIONS AND COMPETITIVE LABOR-MARKETS

This paper analyzes an agency problem where managers are able to contr ol an unobservable variable which affects the time distribution of ret urns on a firm's investments. Managers have an incentive to select myo pic investments in order to convince the labor market that they have r elatively high ability. We demonstrate that if employment terms are de termined in competitive labor markets and there are lower bounds on co mpensations, then at the principal's second best contract, managers ma ke a myopic investment choice. We also characterize the structure of t he principal's second best contract and conduct comparative statics at this solution.