If ownership and control are separated, leaving the manager with discretion may be of value. This paper discusses the extent to which a firm's ownership structure may serve as a commitment for shareholders not to interfere with the manager's project decisions, thereby reducing the agency cost of...

This paper considers a competitive search market where sellers have private information about a good's quality. It is shown that separation of types may arise naturally if high-quality sellers derive a greater utility from search than low-quality sellers. For instance, sellers of high-quality...

In a seminal paper, Rothschild and Stiglitz (1976) show that competitive markets with incomplete information in which firms offer contracts to screen privately informed agents may have no equilibrium. In this paper, we argue that frictions in the form of delay or congestion provide a natural...

In an internal capital market, individual departments may compete for a share of the firm's budget by engaging in wasteful influence activities. We show that firms with more levels of hierarchy may experience lower influence costs than less hierarchical firms, even though the former provide more...

This paper presents a theory of integration based on the inability of parties to write comprehensive financial contracts. In our model, integration entails both benefits and costs. On the one hand, integration involves liquidity spillovers between projects ensuring that integrated firms can...

If contracting within the firm is incomplete, managers will expend resources on trying to appropriate a share of the surplus that is generated. We show that outside ownership may alleviate the deadweight losses associated with such costly distributional conflict, even if all it does is add...

In a seminal paper, Holmström and Milgrom (1987) examine a principal-agent problem in which an agent controls the drift of a Brownian motion. Given that the agent can revise his control continuously, they show that the optimal sharing rule is linear in aggregated output. In this paper, we...

The continuous-time principal-agent model with exponential utility developed by Holmström and Milgrom (1987)admits a simple closed-form solution: The second-best sharing rule is a linear function of aggregated output. Here, we show that the first-best sharing rule is also linear in aggregated...

This paper considers the choice of tender offer financing in the presence of atomistic shareholders. If the tender offer is financed with debt, the raider can extract at least part of the gains from future value improvements as the additional leverage introduced into the merged firm reduces the...

Optimal incentive schemes need not be complicated. In a hidden action model with lognormally distributed output, Mirrlees (1974) shows that the first-best outcome can be approached arbitrarily closely by a suitably chosen sequence of step functions. The present paper shows that this result...