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A Note on the Value of Residual Claimancy with Competing Vertical Hierarchies

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Abstract

In this short paper we study a competing vertical hierarchies model where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions. We find a set of circumstances in which the (equilibrium) allocation of residual claimancy is affected by competition in a non trivial manner. More precisely, although revenue-sharing contracts foster agents. (non-contractible) surplus enhancing effort, we show that competing principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient types. This is because reducing the surplus share of inefficient types reduces the information rent given up to efficient types. Hence, the equilibrium allocation of residual claimancy follows a pro-cyclical rule.

Suggested Citation

  • Riccardo Martina & Salvatore Piccolo, 2011. "A Note on the Value of Residual Claimancy with Competing Vertical Hierarchies," CSEF Working Papers 291, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:291
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    Keywords

    Adverse selection; residual claimancy; vertical hierarchies;
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