A Theory of Capital Structure with Strategic Defaults and Priority Violations

Hans Hvide and Todd Kaplan

Microeconomics from University Library of Munich, Germany

Abstract: Why do firms delegate job design decisions to workers and what are the implications of such delegation? We develop a private-information based theory of delegation where delegation provides a more efficient allocation of talent inside the firm, but at the cost that low ability workers must be compensated to self-sort. Career concerns limit the effectiveness of delegation: when returns to ability or market observability of job content are high, the compensation needed to get low-ability workers to self-sort is high, and firms limit delegation to avoid cream-skimming of the high-ability workers. We investigate implications for how misallocation of talent within firms may occur, the optimal design of incentive contracts, and which decisions are more likely to be delegated to subordinates.

Keywords: Cash Diversion; Costly State Verification; Outside Equity; Financial Contracts. (search for similar items in EconPapers)
JEL-codes: D1 D2 D3 D4 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2003-11-05
Note: Type of Document - pdf; prepared on WinXP; pages: 40
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0311/0311001.pdf (application/pdf)

Related works:
Working Paper: A Theory of Capital Structure with Strategic Defaults and Priority Violations (2003)
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: https://EconPapers.repec.org/RePEc:wpa:wuwpmi:0311001

Access Statistics for this paper

More papers in Microeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).