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Motivating Wealth-Constrained Actors

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  • David E. M. Sappington
  • Tracy R. Lewis

Abstract

We examine how owners of productive resources (e.g. public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit--the resource owner always shares the operator's profit; (2) dispersed enterprise ownership--resources are widely distributed among operators of varying ability; (3) limited benefits of competition--the owner may not benefit from increased competition for the resource; and, sometimes (4) diluted incentives for the most capable--more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.4.944
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 4 (September)
Pages: 944-960

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:4:p:944-960

Note: DOI: 10.1257/aer.90.4.944
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References

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Cited by:
  1. Xinyu Hua, 2004. "Strategic Ex-ante Contracts: Rent-Extraction and Opportunity Costs," Econometric Society 2004 North American Summer Meetings 564, Econometric Society.
  2. Felipe Balmaceda, 2013. "On the Optimality of One-size-fits-all Contracts: The Limited Liability Case," Working Papers 39, Facultad de Economía y Empresa, Universidad Diego Portales.
  3. Lucia Quesada & Omar Chisari, 2005. "Trade Balance Constraints and Optimal Regulation," Industrial Organization 0504004, EconWPA.
  4. Jose E. Quintero Jaramillo, 2004. "Liquidity Constraints And Credit Subsidies In Auctions," Business Economics Working Papers wb040604, Universidad Carlos III, Departamento de Economía de la Empresa.
  5. Ollier, Sandrine & Thomas, Lionel, 2013. "Ex post participation constraint in a principal–agent model with adverse selection and moral hazard," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2383-2403.
  6. Christian Espinosa & Juan Gorigoitía & Carlos Maquieira, 2012. "Nonlinear behaviour of EMBI index:the case of eastern European countries," Working Papers 37, Facultad de Economía y Empresa, Universidad Diego Portales.

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