The Entrepreneur's Reward for Self-policing

Yoram Barzel

Economic Inquiry, 1987, vol. 25, issue 1, 103-16

Abstract: Collaboration among people is often subject to shirking; the net gain from collaboration depends on the contract governing it. The author argues that the entrepreneur assumes the role of residual claimant because his actions are more costly to monitor than those of the factors with which he collaborates. By offering fixed pay contracts to others and becoming residual claimant, the entrepreneur curtails his incentive to gain at his partners' expense, and the net gain from collaboration is then maximized. Costly monitoring applies to both labor and capital , and thus the entrepreneur may supply both. The entrepreneur's capital serves to guarantee the pay of the other factors. Copyright 1987 by Oxford University Press.

Date: 1987
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