Document Type : Research Article
Authors
1 Department of Management Information Systems, Faculty of Business Administration, Halic University, Istanbul, Turkey
2 Department of Industrial Engineering, Faculty of Engineering, Boğaziçi University, Istanbul, Turkey
10.30473/coam.2026.76476.1366
Abstract
This paper investigates the structural divergence in investment behavior that arises from the temporal misalignment between shareholders and managers within a principal-agent framework. We develop a continuous-time optimal control model in which the agent's contract horizon serves as the fundamental determinant of investment incentives, rather than information asymmetry or moral hazard. The analysis establishes that the gap between shareholder and managerial investment objectives is not incidental but structurally embedded in the finite nature of managerial tenure: even under perfect information and symmetric monitoring, managers systematically underinvest relative to the socially optimal level. Three contract scenarios are examined to characterize this dynamic fully. In the infinite-horizon case, the agent's objectives converge to those of the shareholder, yielding a benchmark steady-state equilibrium. In the fixed-horizon case, the approaching contract expiration date progressively erodes investment incentives, driving managerial effort toward zero at the terminal date. In the free-horizon case, where the agent endogenously determines the exit time, the same myopic pattern emerges through the transversality conditions governing the optimal stopping decision. Across all three scenarios, the analysis identifies the precise parametric conditions under which principal and agent objectives either align or persistently diverge. It demonstrates that long-term contracting is the necessary — though not always sufficient — mechanism for closing the structural investment gap.
Highlights
- A deterministic optimal control model isolates the effect of contract duration on managerial investment.
- Horizon mismatch between finite manager tenure and infinite firm lifespan causes structural underinvestment.
- Phase diagram analysis proves a persistent investment gap (aₛ > a) across all contract scenarios.
- Higher performance bonuses narrow the investment gap but cannot eliminate it under finite horizons.
- Long-term contracts are identified as the necessary condition for principal–agent goal alignment.
Keywords
- Agency theory
- Principal–agent problem
- Investment behavior
- Corporate governance
- Dynamic decision-making
- Managerial incentives
Main Subjects
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