This paper develops a principal-agent model of the firm in which shareholders give an incentive contract to a manager to limit the socially costly extraction of private benefits, and to induce truthful revelation of the manager's type. We assume a type-dependent reservation utility. More...

This paper studies the optimal managerial compensation when the shareholders may invest in private protection to reinforce their protection. The optimal contract exhibits three tolls: the wage, the level of dividends (which is equivalent to the level of diversion) and the level of private...

This model captures one of the key elements of the value diversion controversy. Within a standard mixed model, we show that shareholders are better off if they allow a certain amount of diversion even if it generates a dead-weight loss.