Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions
Volume: Volume 36, No. 2
Issue: Summer 2005
Pages: 318-336
Authors: Patrick W. Schmitz
Title: Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions
Abstract: I discuss 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.