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Delegation through Managerial Contracts: Is Hiring a Manager a Good Idea?

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  • Daron Acemoglu

Abstract

Why would an entrepreneur hire a manager? It could be because managers are particularly talented people. This paper suggests another reason. We consider a model with asymmetric information between financiers and entrepreneurs which gives rise to sizable inefficiencies. Under simple conditions, both the debt and the equity markets collapse and no project is financed. Or else, all projects are financed and there is overinvestment. However when the entrepreneurs can hire managers and write publicly observable contracts leaving the financing and investment decisions to the manager, first-best efficiency is restored. We argue that this is an example of a more general phenomena that delegation of control through observable and enforceable contracts to a third party will often increase efficiency in a principle-agent type relationship.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0082.

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Date of creation: Jun 1992
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Handle: RePEc:cep:cepdps:dp0082

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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