Abstract: Agents choose to acquire skills ranging from simple and transparent tasks to complex and opaque ones. While potentially more productive, the latter generate more severe agency problems. In our overlapping generations model, agents compete with their predecessors. With dynamic contracts, long horizons help principals incentivize agents. Agents with short horizons are more diffcult to incentivize than agents with long horizons. Hence, old agents are imperfect substitutes for young ones. This reduces competition between generations. As a result, young managers can opt for more opaque and complex technologies, and therefore larger rents, than their predecessors. Thus, in equilibrium, complexity and rents rise over time. Our theoretical results are in line with the increase in complexity and rents observed in the finance sector.
Bio: Bruno Biais holds a Ph.D. from HEC and is Professor at the Toulouse School of Economics (CRM/CNRS IDEI). His work has been published in Econometrica, the JPE, the AER, the Review of Economic Studies, the Journal of Finance and the RFS. He taught at HEC, CMU, LBS, Oxford and LSE. He has been a scientific adviser of Euronext, the NYSE, the AMF and the Bank of England. He received the CNRS bronze medal and is a Fellow of the Econometric Society and the Finance Theory Group. He has been editor of the Review of Economic Studies and is co-editor of the Journal of Finance.
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