Ownership structure and efficiency: An incentive mechanism approach

Abstract We compare efficiency implications of two team production models involving problems of team moral hazard and adverse selection. The models, formalized in a generalized principal/multiple-agent framework, differ only in the underlying ownership structures, one characterized by absentee ownership, the other by cooperative ownership. Explicit comparison of optimal contractual solutions suggests that, even if a firm is viewed as a nexus of complete contracts, the ownership structure of the firm matters for its economic efficiency. In this context, the cooperative firm can achieve first-best production efficiency, whereas the absentee-owner's firm cannot. Related issues are discussed throughout the paper

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