Abstract

http://ssrn.com/abstract=890865
 
 

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Moral Hazard, Hold-Up, and the Optimal Allocation of Control Rights


Vijay Yerramilli


University of Houston, C. T. Bauer College of Business

August 31, 2011

RAND Journal of Economics, Vol. 42, No. 4, 2011

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 payoff s. 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

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Date posted: March 15, 2006 ; Last revised: September 25, 2012

Suggested Citation

Yerramilli, Vijay, Moral Hazard, Hold-Up, and the Optimal Allocation of Control Rights (August 31, 2011). RAND Journal of Economics, Vol. 42, No. 4, 2011. Available at SSRN: http://ssrn.com/abstract=890865 or http://dx.doi.org/10.2139/ssrn.890865

Contact Information

Vijay Yerramilli (Contact Author)
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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