Controlling versus Enabling

38 Pages Posted: 9 Jul 2015 Last revised: 20 Jul 2016

See all articles by Andrei Hagiu

Andrei Hagiu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Julian Wright

National University of Singapore (NUS) - Department of Economics

Date Written: July 1, 2016

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

Suggested Citation

Hagiu, Andrei and Wright, Julian, Controlling versus Enabling (July 1, 2016). Harvard Business School Strategy Unit Working Paper No. 16-002. Available at SSRN: https://ssrn.com/abstract=2627843 or http://dx.doi.org/10.2139/ssrn.2627843

Andrei Hagiu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-313
Cambridge, MA 02142
United States
617-715-4844 (Phone)

HOME PAGE: http://andreihagiu.com/

Julian Wright

National University of Singapore (NUS) - Department of Economics ( email )

AS2 Level 6, 1 Arts Link
Singapore 117570
Singapore
6568743941 (Phone)
6567752646 (Fax)

HOME PAGE: http://profile.nus.edu.sg/fass/ecsjkdw/

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