Motivating Wealth-Constrained Actors

American Economic Review · 2000 · Volume 90 · Issue 4

Abstract

We examine how owners of productive resources (e.g. public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit--the resource owner always shares the operator's profit; (2) dispersed enterprise ownership--resources are widely distributed among operators of varying ability; (3) limited benefits of competition--the owner may not benefit from increased competition for the resource; and, sometimes (4) diluted incentives for the most capable--more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored.

Keywords

Comparison of Public and Private Enterprises, Privatization, Contracting Out, Asymmetric and Private Information, Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies, Auctions

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