Negative agency costs

Managerial opportunism is commonly considered destructive for the parties involved in an agency relationship. Using a game formulation derived from Jensen and Meckling’s equity model, we consider an agency relationship between a manager and an investor, where the manager can extract private benefits. The outside investor is assumed to benefit from funding opportunities in the banking sector at rate r\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$r$$\end{document}. For high levels of the rate of interest, we prove that the agency costs are negative irrespective of whether the manager or the investor acts as the leader in the agency relation. These results suggest that external conditions may have a differentiated impact on the ex ante and ex post inefficiencies created by managerial opportunism.