This paper develops a model with endogenous agency costs that is other
wise quite similar to the canonical real business cycle model. The tra
ditional assumption in the literature is that these agency costs arise
in the production of investment goods. In contrast, this paper assume
s that these costs are all encompassing in the sense that they arise i
n the production of aggregate output. The paper explores both the impo
rtance of the investment vs. output assumption for business cycle dyna
mics, and the conditions under which these agency models can deliver a
mplification and/or persistence. The paper has two principal conclusio
ns. First, in terms of amplification and propagation, the output model
performs worse than does the investment model. This arises because a
variable distortion in the investment market has more of an impact tha
n a comparable distortion in the output market. Second, in this model
with optimal consumption choice by entrepreneurs, there is a clear ten
sion between amplification and persistence.