Process Intangibles and Agency Conflicts

79 Pages Posted: 9 Feb 2023 Last revised: 16 Jun 2023

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology

Ali Kakhbod

University of California, Berkeley

Maziar Kazemi

Arizona State University (ASU) - Finance Department

Hao Xing

Boston University - Questrom School of Business

Date Written: February 7, 2023

Abstract

Intangible capital can be used to create new goods and services (product intangibles) or to improve the efficiency of the firm (process intangibles). We reveal and study a new empirical fact: Executive and skilled labor pay is increasing in firm process intensity (the fraction of intangibles corresponding to process intangibles). We rationalize this fact in a dynamic principal-agent model. The optimal contract reveals a direct and indirect effect of process intensity on compensation. The direct effect is a level effect: Higher process intensity increases the returns to shirking. The indirect effect is a slope effect: Higher complementarity between process intangibles and physical capital investment increases the hold up power the agent has over the firm for any level of process intensity. We verify these effects in the data. Importantly, we show that these effects are present in executive compensation and in the wages of highly skilled innovative employees, which we are able to measure using proprietary granular vacancy posting data from a labor-market data firm. In our baseline specification, a one standard deviation increase in process intensity is associated with an 8% increase in executive pay and a 3% increase in skilled labor wages relative to industry peers.

Keywords: Process Intangibles, Intangible capital, Dynamic contracting, Compensation

JEL Classification: D21, E22, G31, G32, L22, O31, O34

Suggested Citation

Chen, Hui and Kakhbod, Ali and Kazemi, Maziar and Xing, Hao, Process Intangibles and Agency Conflicts (February 7, 2023). MIT Sloan Research Paper No. 6927-23, Available at SSRN: https://ssrn.com/abstract=4351116 or http://dx.doi.org/10.2139/ssrn.4351116

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
+1 (617) 324-3896 (Phone)

Ali Kakhbod

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Maziar Kazemi (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Hao Xing

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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