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Resolving Double Moral Hazard Problems with Buyout Agreements

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Author Info
Joel S. Demski
David E.M. Sappington

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Abstract

We consider a double moral hazard problem in which the efforts of two parties, e.g., a principal who initially owns an enterprise and a risk-averse agent in the enterprise, are not verifiable. The realized value of the enterprise's random profit stream is also unverifiable. There is also no third party to break a "balanced budget" requirement. Nevertheless, the double moral hazard problem can be resolved completely and costlessly when the principal, who can observe the agent's actions, has the option of requiring the agent to purchase the enterprise at a prenegotiated price.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 22 (1991)
Issue (Month): 2 (Summer)
Pages: 232-240
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Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:232-240

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  3. Steven A. Matthews, 1991. "Renegotiation of Sales Contracts under Moral Hazard," Discussion Papers 950, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December. [Downloadable!]
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  6. Alan Schwartz & Joel Watson, 2000. "Economic and Legal Aspects of Costly Recontracting," University of California at San Diego, Economics Working Paper Series 2000-05, Department of Economics, UC San Diego. [Downloadable!]
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  10. Martimort, D. & Sand-Zantman, W., 2004. "Signaling and the Design of Delegated Management for Public Utilities," Cahiers du LASER (LASER Working Papers) 2004.11, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1. [Downloadable!]
  11. Evans, R., 2006. "Simple Efficient Contracts in Complex Environments," Cambridge Working Papers in Economics 0627, Faculty of Economics, University of Cambridge. [Downloadable!]
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  12. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  13. Matthew Ellman, 2004. "Specificity Revisited: The Role of Cross-Investments," Economics Working Papers 799, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005. [Downloadable!]
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  15. Anil Arya & Jonathan Glover & K. Sivaramakrishnan., . "The Interaction between Decision and Control Problems and the Value of Information," Corporate Finance & Organizations _016, Ohio State University. [Downloadable!]
  16. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  17. Steven A. Matthews, 1993. "Renegotiation of Sales Contracts," Discussion Papers 1051, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  18. Giorgio Coricelli & Luigi Luini, 1999. "Double Moral Hazard: an Experiment on Warranties," CEEL Working Papers 9901, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
  19. Chongwoo Choe, 2001. "Optimal Executive Compensation: Some Equivalence Results," Discussion Paper Series a419, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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