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Separation of Ownership and Control: Delegation as a Commitment Device

  • Aristotelis Boukouras

    (Georg-August-University Göttingen)

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    This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker, whose eff ort is necessary for running a project. The worker\'s eff ort determines the probability that the project will be completed on time, but the worker receives some unobservable benefi t by continuing his employment in the project. Thus, motivating the worker requires an efficiency wage which is inflated by the private benefit. The entrepreneur would pay out a smaller wage if he could commit to terminate the project if a delay occurs, but this threat is not credible, because the project has positive continuation value. We show that hiring a manager can solve this time-inconsistency issue and reduce the efficiency wage. We extend the model to include managerial moral hazard and we examine the conditions under which separation of ownership and control is more likely to happen. The model is consistent with many of the findings of the empirical literature, while it generates some new predictions too.

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    File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_79.pdf
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    Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 79.

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    Date of creation: 10 May 2011
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    Handle: RePEc:got:gotcrc:079
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    Web page: http://www.uni-goettingen.de/en/82144.html

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    1. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 253-279, 04.
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