Agency Conflicts over the Short and Long Run: Short-Termism, Long-Termism, and Pay-for-Luck∗

We develop a dynamic agency model in which the agent controls current earnings via short-term effort and firm growth via long-term effort and the firm is subject to both shortand long-run shocks. Under the optimal contract, agency conflicts can induce both overand underinvestment in shortand long-term efforts compared to first best, leading to shortor long-termism in corporate policies. Exposure to longrun shocks introduces pay-for-luck in incentive compensation but only after sufficiently good performance due to incentive compatibility, thereby rationalizing the asymmetric benchmarking observed in the data. Correlated shortand long-run shocks to earnings and firm size lead to externalities in incentive provision over different time horizons.