Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/90578
Authors: 
Boukouras, Aristotelis
Year of Publication: 
2011
Series/Report no.: 
Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 79
Abstract: 
This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker, whose effort is necessary for running a project. The worker\'s effort determines the probability that the project will be completed on time, but the worker receives some unobservable benefi t by continuing his employment in the project. Thus, motivating the worker requires an efficiency wage which is inflated by the private benefit. The entrepreneur would pay out a smaller wage if he could commit to terminate the project if a delay occurs, but this threat is not credible, because the project has positive continuation value. We show that hiring a manager can solve this time-inconsistency issue and reduce the efficiency wage. We extend the model to include managerial moral hazard and we examine the conditions under which separation of ownership and control is more likely to happen. The model is consistent with many of the findings of the empirical literature, while it generates some new predictions too.
Subjects: 
control structure
delegation
efficiency wage
entrepreneur
managerial contract
moral hazard
organizational hierarchy
private bene fits
separation of owner-ship and control
time-inconsistency
JEL: 
D86
G34
J31
L22
L26
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.