Motivating Wealth-Constrained Actors

David Sappington and Tracy Lewis

American Economic Review, 2000, vol. 90, issue 4, 944-960

Abstract: We examine how owners of productive resources (e.g. public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit--the resource owner always shares the operator's profit; (2) dispersed enterprise ownership--resources are widely distributed among operators of varying ability; (3) limited benefits of competition--the owner may not benefit from increased competition for the resource; and, sometimes (4) diluted incentives for the most capable--more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored.

JEL-codes: D44 D82 G24 L33 (search for similar items in EconPapers)
Date: 2000
Note: DOI: 10.1257/aer.90.4.944
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Citations: View citations in EconPapers (21)

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