Optimal financial contracting and the effects of firm's size

We consider the design of optimal dynamic policy for a firm subject to moral hazard problems. With respect existing literature we enrich model by introducing durable capital with partial irreversibility, which makes size state variable. This allows us analyze role firm's size, separately from age and financial structure. show that higher level decreases probability liquidation increases future firm. Although analytical results are not available, through simulations that, conditional on rate growth firm, its variability, variability decline age.