Ownership, Control, and Incentive
AbstractThe paper shows that the principal can enhance her control over the agent's human capital by acquiring the physical capital that is critical for him to create value. However, the enhancement in the control necessarily reduces his incentive to make human capital investment ex ante and to exert e�ort ex post. This trade-off between control and incentive thus decides the boundary of the firm. The paper also presents a rationale for M-form firms: centralized ownership of physical capital to facilitate coordination, and dispersed payoff rights to incentivize divisions.
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Bibliographic InfoPaper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 676.
Date of creation: 03 Nov 2009
Date of revision:
Postal: Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-BEC-2009-11-14 (Business Economics)
- NEP-CTA-2009-11-14 (Contract Theory & Applications)
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