IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

A Theory of Capital Structure with Strategic Defaults and Priority Violations

  • Hans K. Hvide
  • Todd Kaplan

Why do firms delegate job design decisions to workers and what are the implications of such delegation? We develop a private-information based theory of delegation where delegation provides a more efficient allocation of talent inside the firm, but at the cost that low ability workers must be compensated to self-sort. Career concerns limit the effectiveness of delegation: when returns to ability or market observability of job content are high, the compensation needed to get low-ability workers to self-sort is high, and firms limit delegation to avoid cream-skimming of the high-ability workers. We investigate implications for how misallocation of talent within firms may occur, the optimal design of incentive contracts, and which decisions are more likely to be delegated to subordinates.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econwpa.repec.org/eps/mic/papers/0311/0311001.pdf
Download Restriction: no

Paper provided by EconWPA in its series Microeconomics with number 0311001.

as
in new window

Length: 40 pages
Date of creation: 05 Nov 2003
Date of revision:
Handle: RePEc:wpa:wuwpmi:0311001
Note: Type of Document - pdf; prepared on WinXP; pages: 40
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  2. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  3. Bauer, Thomas K. & Bender, Stefan, 2001. "Flexible Work Systems and the Structure of Wages: Evidence from Matched Employer-Employee Data," IZA Discussion Papers 353, Institute for the Study of Labor (IZA).
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. Eugene F. Fama & Kenneth R. French, . "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”," CRSP working papers 506, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437 Elsevier.
  7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  8. James Malcomson & James A. Fairburn, 2000. "Performance, Promotion, and the Peter Principle," Economics Series Working Papers 26, University of Oxford, Department of Economics.
  9. Olsen, Trond E & Torsvik, Gaute, 2000. "Discretion and Incentives in Organizations," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 377-404, July.
  10. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-56, June.
  11. Anne Villamil & Stefan Krasa & Tridib Sharma, 2004. "Enforcement and Firm Finance," 2004 Meeting Papers 868, Society for Economic Dynamics.
  12. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
  13. Gale, Douglas & Hellwig, Martin, 1989. "Repudiation and Renegotiation: The Case of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 3-31, February.
  14. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  15. Rubinstein, Ariel, 1991. "Comments on the Interpretation of Game Theory," Econometrica, Econometric Society, vol. 59(4), pages 909-24, July.
  16. Lucian Arye Bebchuk, 2002. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," Journal of Finance, American Finance Association, vol. 57(1), pages 445-460, 02.
  17. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  18. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  19. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 1-32.
  20. Erik BERGLÖF & Gérard ROLAND & Ernst-Ludwig VON THADDEN, 2000. "An Incomplete Contracts Approach to Corporate Bankruptcy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.12, Université de Lausanne, Faculté des HEC, DEEP, revised Apr 2002.
  21. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
  22. Mark Rosenzweig & Andrew D. Foster, . "Comparative Advantage, Information and the Allocation of Workers to Tasks: Evidence from an Agricultural Labor Market," Home Pages _066, University of Pennsylvania.
  23. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  24. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  25. Fluck, Zsuzsanna, 1998. "Optimal Financial Contracting: Debt versus Outside Equity," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 383-418.
  26. Caroli, Eve & Greenan, Nathalie & Guellec, Dominique, 2001. "Organizational Change and Skill Accumulation," Industrial and Corporate Change, Oxford University Press, vol. 10(2), pages 481-506, June.
  27. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
  28. A. Admati & P. Pßeiderer & J. Zechner, 2005. "Large shareholder activism, risk sharing, and financial market equilibrium," Public Economics 0502011, EconWPA.
  29. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  30. Ronald W. Anderson & Kjell G. Nyborg, 2001. "Financing and corporate growth under repeated moral hazard," LSE Research Online Documents on Economics 25050, London School of Economics and Political Science, LSE Library.
  31. Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
  32. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
  33. Robert B. Wilson, 1967. "Competitive Bidding with Asymmetric Information," Management Science, INFORMS, vol. 13(11), pages 816-820, July.
  34. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  35. Marschak, Thomas & Reichelstein, Stefan, 1998. "Network Mechanisms, Informational Efficiency, and Hierarchies," Journal of Economic Theory, Elsevier, vol. 79(1), pages 106-141, March.
  36. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," NBER Working Papers 5907, National Bureau of Economic Research, Inc.
  37. John H. Boyd & Bruce D. Smith, 1996. "The use of debt and equity in optimal financial contracts," Working Papers 537, Federal Reserve Bank of Minneapolis.
  38. Raghuram Rajan & Julie Wulf, 2003. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," NBER Working Papers 9633, National Bureau of Economic Research, Inc.
  39. Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, 06.
  40. Gregor Andrade & Steven N. Kaplan, 1997. "How Costly is Financial (not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," NBER Working Papers 6145, National Bureau of Economic Research, Inc.
  41. Jan Zabojnik, 2002. "Centralized and Decentralized Decision Making in Organizations," Journal of Labor Economics, University of Chicago Press, vol. 20(1), pages 1-22, January.
  42. Bauer, Thomas K., 2003. "Flexible Workplace Practices and Labor Productivity," IZA Discussion Papers 700, Institute for the Study of Labor (IZA).
  43. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
  44. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpmi:0311001. 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: (EconWPA)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.