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Delegation through managerial contracts: is hiring a manager a good idea?

Acemoglu, Daron (1992) Delegation through managerial contracts: is hiring a manager a good idea? CEPDP, 82. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: 82

Abstract

Why would an entrepreneur hire a manager? It could be because managers are particularly talented people. This paper suggests another reason. We consider a model with asymmetric information between financiers and entrepreneurs which gives rise to sizable inefficiencies. Under simple conditions, both the debt and the equity markets collapse and no project is financed. Or else, all projects are financed and there is overinvestment. However when the entrepreneurs can hire managers and write publicly observable contracts leaving the financing and investment decisions to the manager, first-best efficiency is restored. We argue that this is an example of a more general phenomena that delegation of control through observable and enforceable contracts to a third party will often increase efficiency in a principle-agent type relationship.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 1992 Daron Acemoglu
Subjects: H Social Sciences > HD Industries. Land use. Labor
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 20 Aug 2008 16:25
Last Modified: 01 Mar 2013 09:31
URI: http://eprints.lse.ac.uk/id/eprint/21047

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