Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis

Abstract

This paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business-cycle dynamics. A principal conclusion is that the agency-cost model replicates the empirical fact that output growth displays positive autocorrelation at short horizons. This hump-shaped output behavior arises because households delay their investment decisions until agency costs are at their lowers--a point in time several periods after the initial shock.

JEL Classification: E32, E44