Separation of Ownership and Control: Delegation as a Commitment Device

39 Pages Posted: 20 May 2011 Last revised: 23 Jul 2013

Date Written: May 17, 2013

Abstract

This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker for providing eff ort to complete a project. The worker's eff ort determines the probability that the project is completed on time, but the worker receives unobservable bene fits for every period she is employed. We show that hiring a manager on a short-term contract may increase the firm value and we identify the conditions under which separation of ownership and control is optimal. The model is consistent with empirical fi ndings.

Keywords: control structure, delegation, efficiency wage, entrepreneur, managerial contract, moral hazard, organizational hierarchy, private benefits

JEL Classification: D86, G34, J31, L22, L26

Suggested Citation

Boukouras, Aristotelis, Separation of Ownership and Control: Delegation as a Commitment Device (May 17, 2013). Available at SSRN: https://ssrn.com/abstract=1839245 or http://dx.doi.org/10.2139/ssrn.1839245

Aristotelis Boukouras (Contact Author)

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

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