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American Economic Review: Vol. 90 No. 4 (September 2000)

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Motivating Wealth-Constrained Actors

Article Citation

Lewis, Tracy R., and David E. M. Sappington. 2000. "Motivating Wealth-Constrained Actors." American Economic Review, 90(4): 944-960.

DOI: 10.1257/aer.90.4.944

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.

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Authors

Lewis, Tracy R. (U FL)
Sappington, David E. M. (U FL)

JEL Classifications

L33: Comparison of Public and Private Enterprises; Privatization; Contracting Out
D82: Asymmetric and Private Information
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
D44: Auctions


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