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Transferable Control

Listed author(s):
  • Philippe Aghion

    (Harvard University and CEPR)

  • Mathias Dewatripont

    (ECARES, Université Libre de Bruxelles, and CEPR)

  • Patrick Rey

    (Université de Toulouse and CEPR)

In this paper, we introduce the notion of transferable control, defined as a situation where one party (the principal, say) can transfer control to another party (the agent) but cannot commit herself to do so. One theoretical foundation for this notion builds on the distinction between formal and real authority introduced by Aghion and Tirole, in which the actual exercise of authority may require noncontractible information, absent which formal control rights are vacuous. We use this notion to study the extent to which control transfers may allow an agent to reveal information regarding his ability or willingness to cooperate with the principal in the future. We show that the distinction between contractible and transferable control can drastically influence how learning takes place: with contractible control, information about the agent can often be acquired through revelation mechanisms that involve communication and message-contingent control allocations; in contrast, when control is transferable but not contractible, it can be optimal to transfer control unconditionally and learn instead from the way in which the agent exercises control. (JEL: C70, C72, D23, L2) Copyright (c) 2004 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 1 (03)
Pages: 115-138

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:1:p:115-138
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  1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
  2. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 39-56.
  3. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 675-702, August.
  4. Philippe Aghion & Mathias Dewatripont & Patrick Rey, 2004. "Transferable Control," Journal of the European Economic Association, MIT Press, vol. 2(1), pages 115-138, 03.
  5. Eric Maskin, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 23-38.
  6. Patrick Legros & Andrew F. Newman, 2008. "Competing for Ownership," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1279-1308, December.
  7. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 83-114.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, April.
  9. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  10. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
  11. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
  12. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  13. Philippe Aghion & Mathias Dewatripont & Patrick Rey, 2004. "Transferable Control," Journal of the European Economic Association, MIT Press, vol. 2(1), pages 115-138, 03.
  14. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  15. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  16. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
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