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Motivating Wealth-Constrained Actors

  • David E. M. Sappington
  • Tracy R. Lewis

We examine how owners of productive resources (e.g. public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit--the resource owner always shares the operator's profit; (2) dispersed enterprise ownership--resources are widely distributed among operators of varying ability; (3) limited benefits of competition--the owner may not benefit from increased competition for the resource; and, sometimes (4) diluted incentives for the most capable--more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.4.944
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 4 (September)
Pages: 944-960

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:4:p:944-960
Note: DOI: 10.1257/aer.90.4.944
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