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

Patrick Schmitz

No 5145, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D23 L23 O32 (search for similar items in EconPapers)
Date: 2005-07
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (114)

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Journal Article: Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions (2005)
Working Paper: Allocating control in agency problems with limited liability and sequential hidden actions (2005)
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