We study long-term investment in a dynamic agency model with multitasking. The manager’s short-term task determines current performance which deteriorates if he invests 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) technological returns to investment. These distortions decrease as good performance relaxes endogenous financial constraints arising from the agency problem, implying negative (positive) investment-cash flow sensitivities. Investment distortions and cash flow sensitivities increase in absolute terms with short-term performance pay and external financing costs.

Continuous Time Contracting, Multiple Tasks, Delegated Investment, Managerial Compensation, Endogenous Financing Frictions, Investment Dynamics
Economics of Contract Law (jel D86), Intertemporal Firm Choice and Growth, Investment, or Financing (jel D92), Compensation Packages; Payment Methods (jel J33)
Erasmus School of Economics

Hoffmann, F, & Pfeil, S. (2018). Dynamic Multitasking and Managerial Investment Incentives. Retrieved from http://hdl.handle.net/1765/109097