Limited Liability and Incentive Contracting with Multiple Projects
Vienna University of Economics and Business Administration
RAND Journal of Economics, Vol. 32, No. 3
I examine a principal-agent model with multiple projects where a risk-neutral manager is protected by limited liability. The analysis has several interesting implications: (i) Incentive problems are shown to be a natural source of economies of scope, as combining multiple projects under the management of a single manager relaxes the limited liability constraint. (ii) As a result, managers may be overloaded with work and exert inefficiently high effort. (iii) The analysis has implications for the optimal allocation of projects to different managers.
Accepted Paper Series
Date posted: September 4, 2001
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