Testing Agency Theory with Entrepreneur Effort and Wealth





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    • Bitler is from the Public Policy Institute of California, the RAND Corporation, and IZA; Moskowitz is from University of Chicago and NBER; and Vissing-Jørgensen is from Northwestern University CEPR, and NBER. We are grateful to an anonymous referee, Bill Gentry, Rick Green, Steven Haider, John Heaton, Dirk Jenter, Arthur Kennickell, John Krainer, Nicole Maestas, Jay Ritter, Antoinette Schoar, Per Stromberg, John Wolken, Bilge Yilmaz, and seminar participants at Carnegie Mellon University, University of Wisconsin (Milwaukee and Madison), University of British Columbia, Ohio State University, the Board of Governors of the Federal Reserve, the Federal Reserve Bank of Minneapolis, the Department of Justice, the Center for Economic Studies at the Census, the Society of Economic Dynamics, the 2002 Western Finance Association meetings, the 2002 SOLE meetings, the University of Chicago Macro lunch, the NBER Entrepreneurship and Corporate Finance meetings, and the 2004 AEA session on entrepreneurship in San Diego for helpful comments and suggestions. We also thank Troy Andre for outstanding research assistance in numerically solving the model. Bitler thanks the National Institute for Child Health and Development, the National Institute on Aging, the Federal Reserve Bank of San Francisco, and the RAND Corporation, for financial support. Moskowitz thanks the Center for Research in Security Prices and the James S. Kemper Faculty Research Fund at the University of Chicago for financial support. Vissing-Jørgensen thanks the National Science Foundation for support. Much of this work was completed while the first author was at the Board of Governors of the Federal Reserve and the last author was at the Department of Economics, University of Chicago. The views expressed here are those of the authors and not necessarily those of the Federal Reserve.


We develop a principal-agent model in an entrepreneurial setting and test the model's predictions using unique data on entrepreneurial effort and wealth in privately held firms. Accounting for unobserved firm heterogeneity using instrumental-variables techniques, we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk; effort increases with ownership; and effort increases firm performance. The magnitude of the effects in the cross-section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity.