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Transferable Control

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Author Info

  • Philippe Aghion

    (Harvard University and CEPR)

  • Mathias Dewatripont

    (ECARES, Université Libre de Bruxelles, and CEPR)

  • Patrick Rey

    (Université de Toulouse and CEPR)

Abstract

In this paper, we introduce the notion of transferable control, defined as a situation where one party (the principal, say) can transfer control to another party (the agent) but cannot commit herself to do so. One theoretical foundation for this notion builds on the distinction between formal and real authority introduced by Aghion and Tirole, in which the actual exercise of authority may require noncontractible information, absent which formal control rights are vacuous. We use this notion to study the extent to which control transfers may allow an agent to reveal information regarding his ability or willingness to cooperate with the principal in the future. We show that the distinction between contractible and transferable control can drastically influence how learning takes place: with contractible control, information about the agent can often be acquired through revelation mechanisms that involve communication and message-contingent control allocations; in contrast, when control is transferable but not contractible, it can be optimal to transfer control unconditionally and learn instead from the way in which the agent exercises control. (JEL: C70, C72, D23, L2) Copyright (c) 2004 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 1 (03)
Pages: 115-138

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:1:p:115-138

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  1. Philippe Aghion & Mathias Dewatripont & Patrick Rey, 2004. "Transferable Control," Journal of the European Economic Association, MIT Press, vol. 2(1), pages 115-138, 03.
  2. Patrick Legros & Andrew Newman, 2008. "Competing for ownership," ULB Institutional Repository 2013/7020, ULB -- Universite Libre de Bruxelles.
  3. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 811-38, October.
  4. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  5. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
  6. Oliver Hart & John Moore, 1999. "On the design of hierarchies: coordination versus specialization," LSE Research Online Documents on Economics 19340, London School of Economics and Political Science, LSE Library.
  7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  8. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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