The Irrelevance of Control Rights in Agency Models under Risk Neutrality

Susheng Wang

Managerial and Decision Economics, 2014, vol. 35, issue 5, 337-349

Abstract: The allocation of control rights is a key issue in incomplete contracts. In this paper, we add an exit option, the right of early termination, to the standard agency model for employment contracts. We address two questions: (1) Who should have this right? (2) What is the effect of its inclusion in a contract? Under risk neutrality, we find that (1) it does not matter for investments and economic efficiency to whom this right belongs, although it may affect contractual terms and income sharing, and (2) although the allocation of this right does not matter, its inclusion can have either a positive or a negative effect on economic efficiency. Our analysis provides a benchmark for more general analyses on control rights under risk aversion. Copyright © 2013 John Wiley & Sons, Ltd.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:35:y:2014:i:5:p:337-349

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