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Moral hazard, hold‐up, and the optimal allocation of control rights

Moral hazard, hold‐up, and the optimal allocation of control rights I examine the optimal allocation of control rights in a model with manager moral hazard, where the manager and investor may hold up each other ex post. The control allocation determines both the likelihood of hold‐up and the agents’ renegotiation payoffs. In equilibrium, only two control allocations are optimal: either exclusive investor control or a contingent control allocation that allows the manager to remain in control if, and only if, interim performance is good. Thus, my model explains why it may be optimal to link control to the firm’s performance such that managers retain control only following good performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Rand Journal of Economics Wiley

Moral hazard, hold‐up, and the optimal allocation of control rights

The Rand Journal of Economics , Volume 42 (4) – Dec 1, 2011

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References (15)

Publisher
Wiley
Copyright
© 2011, RAND.
ISSN
0741-6261
eISSN
1756-2171
DOI
10.1111/j.1756-2171.2010.00151.x
Publisher site
See Article on Publisher Site

Abstract

I examine the optimal allocation of control rights in a model with manager moral hazard, where the manager and investor may hold up each other ex post. The control allocation determines both the likelihood of hold‐up and the agents’ renegotiation payoffs. In equilibrium, only two control allocations are optimal: either exclusive investor control or a contingent control allocation that allows the manager to remain in control if, and only if, interim performance is good. Thus, my model explains why it may be optimal to link control to the firm’s performance such that managers retain control only following good performance.

Journal

The Rand Journal of EconomicsWiley

Published: Dec 1, 2011

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