Moral Hazard, Hold-Up, and the Optimal Allocation of Control Rights
University of Houston, C. T. Bauer College of Business
August 31, 2011
RAND Journal of Economics, Vol. 42, No. 4, 2011
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.
Number of Pages in PDF File: 47
Keywords: Control rights, Contingent control, Hold-up problem, Moral hazard
JEL Classification: G30, G32, G24
Date posted: March 15, 2006 ; Last revised: September 25, 2012
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