Controlling versus Enabling

Abstract

Revenue sharing between principals and agents is commonly used to balance double-sided moral hazard. We provide a theory of how, when such revenue-sharing is optimal, a principal allocates control rights over decisions that either party could make. We show that the principal either keeps control over all such decisions, or gives up control entirely, and that this choice is aligned with whether the principal chooses to keep more or less than 50% of variable revenues. We explore how moral hazard, contractibility, and spillovers affect this choice. The theory helps explain whether professionals operate as employees or as independent contractors.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2628128

Keywords: control rights, employment, independent contractors, platforms, theory of the firm

JEL Classification: D4, L1, L5