Economics at your fingertips  

Leveraged Buy Out and Tax saving advantage: a double-sided moral hazard model

Ouidad Yousfi ()

No 2008-17, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: We consider a double moral hazard model with three agents: the entrepreneur, the LBO fund and the bank. The entrepreneur and the LBO fund have to exert efforts in order to improve the productivity of their project; efforts are not observable. We show that the bank's payments decrease with the outcome of the project. When the project is not very risky, the entrepreneur and the LBO fund exert first best efforts and they get equal shares of the project's outcome. When it is highly risky, debt gives high powered incentives to the two agents to provide efforts but it still not sufficient to induce them to provide the first best efforts. However, these efforts are more efficient than those that could be provided if the entrepreneur asks the LBO fund for advice and money. Moreover, when the entrepreneur asks for advice from a consultant and for money from a bank, they get equal shares whether the project is very risky or not. When the project is lowly risky, the identity of the advisor (consultant/ LBO fund) is irrelevant. When it is highly risky, the optimal efforts depend on their impact on the performance of the project.

Keywords: LBO; double moral hazard; debt; financial capital structure (search for similar items in EconPapers)
JEL-codes: G23 G24 G32 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2008
New Economics Papers: this item is included in nep-cta and nep-ent
References: View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in EconomiX Working Papers from University of Paris Nanterre, EconomiX Contact information at EDIRC.
Bibliographic data for series maintained by Valerie Mignon ().

Page updated 2020-09-30
Handle: RePEc:drm:wpaper:2008-17