Optimal Delegation when the Large Shareholder has Multiple Tasks

Annalisa Luporini () and Clara Graziano

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: The paper analyzes the optimal delegation and ownership structure in a setting where the owner of a firm hires a manager to run the firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Profits depend on both tasks and optimality would require different ownership stakes. A large stake is necessary for monitoring while a small stake is necessary for not interfering with incentives for project choice. Allocating control rights over project choice to the manager can alleviate this conflict. Delegation is optimal despite dissonant preferences, if managerial private benefits are not too small. By delegating authority over project choice and by using an optimal compensation scheme, the large shareholder is able to retain full ownership of the firm and, at the same time, to provide strong incentives to the manager. However, full ownership comes at the price of distorting monitoring and the resulting firing policy. Severance pay plays a key role in the optimal compensation scheme. We interpret delegation as the choice of a dual-board structure where the supervisory board is in charge of monitoring and management board is in charge of project selection.

Keywords: Large Shareholder; Concentrated Ownership; Delegation; Monitoring; Board of directors; Corporate Governance. (search for similar items in EconPapers)
JEL-codes: G34 L22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010
New Economics Papers: this item is included in nep-cta and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Optimal Delegation when the Large Shareholder has Multiple Tasks (2010)
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