IDEAS home Printed from https://ideas.repec.org/p/zbw/bonedp/272005.html
   My bibliography  Save this paper

Allocating control in agency problems with limited liability and sequential hidden actions

Author

Listed:
  • Schmitz, Patrick W.

Abstract

This paper discusses the optimal organization of sequential agency problems with contractible control actions under limited liability. In each of two stages, a risk-neutral agent can choose an unobservable effort level. A success in the first stage makes e.ort in the second stage more effective. Should one agent be in control in both stages (integration), or should different agents be in charge of the two actions (separation)? Both modes of organization can be explained on the basis of incentive considerations due to moral hazard, without resorting to commitment problems or ad hoc restrictions on the class of feasible contracts.

Suggested Citation

  • Schmitz, Patrick W., 2005. "Allocating control in agency problems with limited liability and sequential hidden actions," Bonn Econ Discussion Papers 27/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
  • Handle: RePEc:zbw:bonedp:272005
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/22933/1/bgse27_2005.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
    2. Itoh, Hideshi, 1994. "Job design, delegation and cooperation: A principal-agent analysis," European Economic Review, Elsevier, vol. 38(3-4), pages 691-700, April.
    3. Mathias Dewatripont, 1988. "Commitment Through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 377-390.
    4. Patrick W. Schmitz, 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(2), pages 315-329, October.
    5. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
    6. Hemmer, Thomas, 1995. "On the interrelation between production technology, job design, and incentives," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 209-245, April.
    7. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages 69-76, March.
    8. Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-526, Autumn.
    9. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    10. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, vol. 91(3), pages 525-541, June.
    11. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
    12. Schmitz, Patrick W., 2002. "On Monopolistic Licensing Strategies under Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 106(1), pages 177-189, September.
    13. Meyer, Margaret A., 1995. "Cooperation and competition in organizations: A dynamic perspective," European Economic Review, Elsevier, vol. 39(3-4), pages 709-722, April.
    14. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    15. Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
    16. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
    17. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    18. Dominique Demougin & Claude Fluet, 1998. "Mechanism Sufficient Statistic in the Risk-Neutral Agency Problem," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(4), pages 622-622, December.
    19. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    20. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
    21. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    22. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    23. Dana Jr. James D., 1993. "The Organization and Scope of Agents: Regulating Multiproduct Industries," Journal of Economic Theory, Elsevier, vol. 59(2), pages 288-310, April.
    24. Jacques Crémer, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 275-295.
    25. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    26. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
    27. Itoh, Hideshi, 1992. "Cooperation in Hierarchical Organizations: An Incentive Perspective," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 321-345, April.
    28. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    29. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The Economics of Career Concerns, Part II: Application to Missions and Accountability of Government Agencies," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 199-217.
    30. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 525-536.
    31. Rosenkranz, Stephanie & Schmitz, Patrick W., 2003. "Optimal allocation of ownership rights in dynamic R&D alliances," Games and Economic Behavior, Elsevier, vol. 43(1), pages 153-173, April.
    32. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    33. Pitchford, Rohan, 1998. "Moral hazard and limited liability: The real effects of contract bargaining," Economics Letters, Elsevier, vol. 61(2), pages 251-259, November.
    34. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
    35. David P. Baron & David Besanko, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, June.
    36. Eyal Winter, 2001. "Scapegoats and Optimal Allocation of Responsibility," Discussion Paper Series dp266, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    37. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    38. Michael H. Riordan & David E. M. Sappington, 1987. "Information, Incentives, and Organizational Mode," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 243-263.
    39. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tymofiy Mylovanov & Patrick Schmitz, 2008. "Task scheduling and moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(2), pages 307-320, November.
    2. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, vol. 57(C), pages 108-117.
    3. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    4. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
    5. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    6. Kazumi Hori, 2014. "Contracting for Multiple Goods under Asymmetric Information: The Two-goods Case," KIER Working Papers 888, Kyoto University, Institute of Economic Research.
    7. Susanne Ohlendorf & Patrick W. Schmitz, 2012. "Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, May.
    8. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
    9. Choe, Chongwoo & Ishiguro, Shingo, 2008. "On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation," MPRA Paper 13451, University Library of Munich, Germany.
    10. Hoppe, Eva I. & Kusterer, David J., 2011. "Conflicting tasks and moral hazard: Theory and experimental evidence," European Economic Review, Elsevier, vol. 55(8), pages 1094-1108.
    11. Leon Yang Chu & David E.M. Sappington, 2009. "Implementing high‐powered contracts to motivate intertemporal effort supply," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 296-316, June.
    12. Doh Shin Jeon, "undated". "Relying on the agent in charge of production for project evaluation," Economics Working Papers 623, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006.
    13. Eva I. Hoppe & Patrick W. Schmitz, 2021. "How (Not) to Foster Innovations in Public Infrastructure Projects," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(1), pages 238-266, January.
    14. Schmitz, Patrick W. & Ohlendorf, Susanne, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
    15. Choe, Chongwoo, 2002. "Delegated Contracting and Corporate Hierarchies," CEI Working Paper Series 2002-7, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    16. Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
    17. Fleckinger, Pierre & Martimort, David & Roux, Nicolas, 2023. "Should They Compete or Should They Cooperate? The View of Agency Theory," TSE Working Papers 23-1421, Toulouse School of Economics (TSE), revised Jan 2024.
    18. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    19. Bickenbach, Frank, 2000. "Regulation of Europe's network industries: the perspective of the new economic theory of federalism," Kiel Working Papers 977, Kiel Institute for the World Economy (IfW Kiel).
    20. Mathias Dewatripont & Patrick Legros, 2005. "Public-private partnerships: contract design and risk transfer," ULB Institutional Repository 2013/175947, ULB -- Universite Libre de Bruxelles.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bonedp:272005. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/gsbonde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.