Date of Award


Degree Type


Degree Name

Doctor of Philosophy


Recent research on agency models has emphasized multiperiod contracts. However, most research has assumed the principal could control agents' consumption, choosing to deny them access to a capital market. The few papers that have examined the role of capital markets in an agency model (Braverman and Stiglitz (1982), Rogerson (1985a)) do not allow agents a joint choice of effort and borrowing. This thesis extends these models by allowing agents this joint choice of borrowing and effort, showing how previous results change.;Agents are allowed access to two types of imperfect capital markets. In one model of the capital market, agents can borrow a maximum amount, while in the other model agents can borrow more, risking default and payment of default costs. In addition, compensation contracts are restricted to dynamic rank-order tournaments. Given this specific structure, the agent's and the principal's problems are solved, the optimal forms of contracts are derived, and specific testable predictions are generated about observable variables.;The major prediction, contrary to Fellingham and Newman (1985), is that with risk-neutrality and borrowing, memory contracts dominate nonmemory contracts. This generalizes the results found under risk-aversion by Rogerson (1985a) and Lambert (1983). Second, within these multiperiod memory contracts, the spread and mean of consumption will be rising over the length of the contest, as will the mean value of wages. The third prediction is that agents who do not receive promotions will be observed working extra hours, and those who have missed two promotions in a row will work a higher number of extra hours. These are new, testable predictions, not found in other agency models.;This thesis extends agency models by introducing capital markets in a fuller manner then previously done, and by concentrating on a dynamic rank-order tournament, also in a fuller manner then previously done. The importance of these extensions is shown by the fact that the introduction of a capital has made a crucial difference to the results. Results from models without capital markets are generalized or changed, and new testable predictions are generated.



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