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Separating control and cash flow rights with moral hazard

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  • Feng, Haotian
  • Li, Jing
  • Xue, Jiongyi

Abstract

This paper builds on Liu and Bernhardt (2025) to demonstrate that a small degree of separation between control and cash flow rights can increase seller revenues, even in the presence of significant moral hazard concerns. We show that the first-order revenue gain from reducing bidders’ information rents outweighs the leading-order revenue loss from the under-provision of efforts due to moral hazard, resulting in the separation mechanism dominating the non-separation benchmark, regardless of the sensitivity of project payoffs to the controller’s effort. This finding advocates the robustness of ownership-control separation in enhancing auction revenues.

Suggested Citation

  • Feng, Haotian & Li, Jing & Xue, Jiongyi, 2026. "Separating control and cash flow rights with moral hazard," Economics Letters, Elsevier, vol. 265(C).
    • Handle: RePEc:eee:ecolet:v:265:y:2026:i:c:s0165176526001990
    DOI: 10.1016/j.econlet.2026.113005
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