Optimal Managerial Tenure in Dynamic Agency with Renegotiation

This paper examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated. In addition to providing a general solution to a multi-period agency problem with serially correlated performance measures, the paper characterizes optimal managerial tenure/turnover policies as a function of the time-series properties of performance measures. With negatively correlated performance measures, the principal prefers longer managerial tenure, and no turnover is optimal. With positively correlated performance measures, absent a switching cost, turnover every period is optimal. In the presence of a fixed switching cost, interior optimal turnover policies exist if the performance measures are positively correlated. The optimal turnover policies present an alternative to theories of performancedriven managerial turnover and are consistent with evidence that a majority of managerial turnovers are (age-related) normal retirements.