A Theory of Entrepreneurial and Managerial Services: Revisiting Penrose from an Agency Perspective

Using a parsimonious principal-agent model, this paper builds a theory of how responsibility for entrepreneurial and managerial services should be allocated among managers within a firm. The paper offers an alternative explanation for the Penrose effect, whereby firm growth is said to be retarded by the time required to assimilate new managers. The paper shows a combination of moral hazard and causal ambiguity can similarly retard firm growth.