The Dynamics of Bargaining Power in a Principal-Agent Model

We propose a dynamic principal-agent model characterized by a state variable given by the agent’s initial bargaining power and by a law of motion that governs the changes of their bargaining power. Through a numerical exercise, we find that agents with the same relative risk aversion show different paths of their bargaining powers; and that the more powerful the incentives, the higher the variability of the agent’s salary. Finally, we implement an empirical equation to identify CEOs’ bargaining powers. Our findings allow the conclusion that efficiency gains could be achieved if CEOs are granted smaller changes in their bargaining powers