IDEAS home Printed from
   My bibliography  Save this paper

Leveraged Buy Out and Tax saving advantage: a double-sided moral hazard model


  • Ouidad Yousfi


We consider a double moral hazard model with three agents: the entrepreneur, the LBO fund and the bank. The entrepreneur and the LBO fund have to exert efforts in order to improve the productivity of their project; efforts are not observable. We show that the bank's payments decrease with the outcome of the project. When the project is not very risky, the entrepreneur and the LBO fund exert first best efforts and they get equal shares of the project's outcome. When it is highly risky, debt gives high powered incentives to the two agents to provide efforts but it still not sufficient to induce them to provide the first best efforts. However, these efforts are more efficient than those that could be provided if the entrepreneur asks the LBO fund for advice and money. Moreover, when the entrepreneur asks for advice from a consultant and for money from a bank, they get equal shares whether the project is very risky or not. When the project is lowly risky, the identity of the advisor (consultant/ LBO fund) is irrelevant. When it is highly risky, the optimal efforts depend on their impact on the performance of the project.

Suggested Citation

  • Ouidad Yousfi, 2008. "Leveraged Buy Out and Tax saving advantage: a double-sided moral hazard model," EconomiX Working Papers 2008-17, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2008-17

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    LBO; double moral hazard; debt; financial capital structure;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:drm:wpaper:2008-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valerie Mignon). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.