This paper presents a model of equilibrium in a capital market for linear shares of risky firms and in a market for managerial labor in which market participants function as both investors and managers. The model yields interesting and relevant equilibrium conditions that integrate earlier separate treatments of the capital market with human capital and the incentive contracting problem regarding shirking. The theory developed here provides a microeconomic explanation of how the price of risk established in the capital market is relevant to the labor contracting problem. The analysis also provides a logical rationale for the division of responsibilities between a board of directors and the management of the firm.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics