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Optimal Delegation when the Large Shareholder has Multiple Tasks

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  • Clara Graziano
  • Annalisa Luporini

Abstract

We analyze the optimal ownership, delegation and compensation structures when a manager is hired to run a firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Optimality would require a large ownership stake for monitoring but a small stake for not interfering with managerial incentives. Delegating project choice to the manager can alleviate this conflict if managerial private benefits are not too small. The large shareholder retains full ownership of the firm but monitoring, and the resulting firing policy, are distorted. Severance pay plays a key role in the optimal compensation scheme. Delegation is interpreted as a dual-board structure.

Suggested Citation

  • Clara Graziano & Annalisa Luporini, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," CESifo Working Paper Series 3028, CESifo.
    • Handle: RePEc:ces:ceswps:_3028
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    1. Clara Graziano & Annalisa Luporini, 2012. "Ownership concentration, monitoring, and optimal board structure," Economics Bulletin, AccessEcon, vol. 32(4), pages 3333-3346.

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    More about this item

    Keywords

    large shareholder; delegation; monitoring; board of directors; corporate governance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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