Dynamic Multitasking and Managerial Investment Incentives

Abstract

We study non-contractible intangible investment in a dynamic agency model with multitasking. The manager's short-term task determines current performance which deteriorates with investment in the firm's future profitability, his long-term task. The optimal contract dynamically balances incentives for short- and long-term performance such that investment is distorted upwards (downwards) relative to first-best in firms with high (low) returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints, implying negative (positive) investment-cash flow sensitivities. Our results shed light on how corporate investment policies, liquidity management and executive compensation structure differ across industries with different returns to intangible investment.

Keywords: Continuous Time Contracting, Multiple Tasks, Delegated Investment, Managerial Compensation, Endogenous Financing Frictions, Investment Dynamics

JEL Classification: D86, D92, J33