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Separation of Ownership and Control: Delegation as a Commitment Device

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  • Aristotelis Boukouras

    ()

Abstract

This paper provides a theoretical model for explaining the separation of ownership and control in fi rms. An entrepreneur hires a worker for providing effort to complete a project. The worker's effort determines the probability that the project is completed on time, but the worker receives private benefit s for every period she is employed. We show that hiring a manager on a short-term contract may increase firm value and we identify the conditions under which separation of ownership and control is optimal.

Suggested Citation

  • Aristotelis Boukouras, 2015. "Separation of Ownership and Control: Delegation as a Commitment Device," Discussion Papers in Economics 15/02, Department of Economics, University of Leicester.
  • Handle: RePEc:lec:leecon:15/02
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    File URL: http://www.le.ac.uk/economics/research/repec/lec/leecon/dp15-02.pdf
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    References listed on IDEAS

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    1. Toxvaerd, Flavio, 2006. "Time of the essence," Journal of Economic Theory, Elsevier, vol. 129(1), pages 252-272, July.
    2. Gerratana Emanuele & Koçkesen Levent, 2012. "Strategic Effects of Renegotiation-Proof Contracts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-49, July.
    3. Doepke, Matthias & Townsend, Robert M., 2006. "Dynamic mechanism design with hidden income and hidden actions," Journal of Economic Theory, Elsevier, vol. 126(1), pages 235-285, January.
    4. Alessandro Bonatti & Johannes Horner, 2011. "Collaborating," American Economic Review, American Economic Association, vol. 101(2), pages 632-663, April.
    5. Bester, Helmut & Sakovics, Jozsef, 2001. "Delegated bargaining and renegotiation," Journal of Economic Behavior & Organization, Elsevier, vol. 45(4), pages 459-473, August.
    6. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
    7. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-646, May.
    8. Picard, Pierre, 1987. "On the design of incentive schemes under moral hazard and adverse selection," Journal of Public Economics, Elsevier, vol. 33(3), pages 305-331, August.
    9. repec:hrv:faseco:30747162 is not listed on IDEAS
    10. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    11. Bensaid, Bernard & Gary-Bobo, Robert J, 1993. "Commitment Value of Contracts under Renegotiation Constraints," Econometrica, Econometric Society, vol. 61(6), pages 1423-1429, November.
    12. Mason, Robin & Välimäki, Juuso, 2008. "Dynamic Moral Hazard and Project Completion," CEPR Discussion Papers 6857, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    commitment problem; control rights; control structure; moral hazard; private bene t; separation of ownership and control; soft-budget constraint; strategic delegation;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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