Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129583
Authors: 
Peitz, Martin
Shin, Dongsoo
Year of Publication: 
2015
Series/Report no.: 
Working Paper Series, Department of Economics, University of Mannheim 15-01
Abstract: 
An entrepreneur needs a lender's capital input to finance a project. The entrepreneur, who is privately informed about the project environment, provides a labor input (effort). Capital and labor are perfect complements. We show that the entrepreneur may optimally distort the project's capital-labor ratio. The direction of the distortion in capital-labor ratio depends on contractibility of the entrepreneur's labor input. If the entrepreneur's labor input is contractible, in the optimal contract, the entrepreneur may provide an excessive amount of labor for the amount of capital funded by the lender. If, by contrast, the entrepreneur's labor input is non-contractible, part of the physical asset funded by the lender may remain idle.
Subjects: 
Agency
Project Finance
Capital-Labor Ratio
Contractibility
JEL: 
D82
D86
G31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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