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Allocating control in agency problems with limited liability and sequential hidden actions

  • Patrick W. Schmitz

This paper discusses the optimal organization of sequential agency problems with contractible control actions under limited liability. In each of two stages, a risk-neutral agent can choose an unobservable effort level. A success in the first stage makes e.ort in the second stage more effective. Should one agent be in control in both stages (integration), or should different agents be in charge of the two actions (separation)? Both modes of organization can be explained on the basis of incentive considerations due to moral hazard, without resorting to commitment problems or ad hoc restrictions on the class of feasible contracts.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse27_2005.

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Length: 36
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:bon:bonedp:bgse27_2005
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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