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Optimal Delegation when the Large Shareholder has Multiple Tasks

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Abstract

The paper analyzes the optimal delegation and ownership structure in a setting where the owner of a firm hires a manager to run the firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Profits depend on both tasks and optimality would require different ownership stakes. A large stake is necessary for monitoring while a small stake is necessary for not interfering with incentives for project choice. Allocating control rights over project choice to the manager can alleviate this conflict. Delegation is optimal despite dissonant preferences, if managerial private benefits are not too small. By delegating authority over project choice and by using an optimal compensation scheme, the large shareholder is able to retain full ownership of the firm and, at the same time, to provide strong incentives to the manager. However, full ownership comes at the price of distorting monitoring and the resulting firing policy. Severance pay plays a key role in the optimal compensation scheme. We interpret delegation as the choice of a dual-board structure where the supervisory board is in charge of monitoring and management board is in charge of project selection.

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  • Annalisa Luporini & Clara Graziano, 2010. "Optimal Delegation when the Large Shareholder has Multiple Tasks," Working Papers - Economics wp2010_05.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  • Handle: RePEc:frz:wpaper:wp2010_05.rdf
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    Cited by:

    1. Clara Graziano & Annalisa Luporini, 2012. "Ownership concentration, monitoring, and optimal board structure," Economics Bulletin, AccessEcon, vol. 32(4), pages 3333-3346.

    More about this item

    Keywords

    Large Shareholder; Concentrated Ownership; Delegation; Monitoring; Board of directors; Corporate Governance.;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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