Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions

36 Pages Posted: 17 Aug 2005

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

This paper discusses the optimal organization of sequential agency problems with contractible control actions under limited liability. In each of two stages, a risk-neutral agent can choose an unobservable effort level. A success in the first stage makes effort in the second stage more effective. Should one agent be in control in both stages (integration), or should different agents be in charge of the two actions (separation)? Both modes of organization can be explained on the basis of incentive considerations due to moral hazard, without resorting to commitment problems or ad hoc restrictions on the class of feasible contracts.

Keywords: Contract theory, hidden action, limited liability, moral hazard

JEL Classification: D23, L23, O32

Suggested Citation

Schmitz, Patrick W., Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions (July 2005). CEPR Discussion Paper No. 5145. Available at SSRN: https://ssrn.com/abstract=785206

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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