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Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions

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  • Schmitz, Patrick W.

Abstract

This paper discusses the optimal organization of sequential agency problems with contractible control actions under limited liability. In each of two stages, a risk-neutral agent can choose an unobservable effort level. A success in the first stage makes effort in the second stage more effective. Should one agent be in control in both stages (integration), or should different agents be in charge of the two actions (separation)? Both modes of organization can be explained on the basis of incentive considerations due to moral hazard, without resorting to commitment problems or ad hoc restrictions on the class of feasible contracts.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5145.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5145

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Keywords: contract theory; hidden action; limited liability; moral hazard;

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