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Limited-Liability and Incentive Contracting with Multiple Projects

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  • Laux, Christian

Abstract

I examine a principal-agent model with multiple projects where a risk-neutral manager is protected by limited liability. The analysis has several interesting implications: (i) incentive problems are shown to be a natural source of economies of scope, as combining multiple projects under the management of a single manager relaxes the limited-liability constraint; (ii) as a result, managers may be overloaded with work and exert inefficiently high effort; and (iii) the analysis has implications for the optimal allocation of projects to different managers. Copyright 2001 by the RAND Corporation.

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  • Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-526, Autumn.
    • Handle: RePEc:rje:randje:v:32:y:2001:i:3:p:514-26
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