Regulating a manager whose empire-building preferences are private information

• Type: Article in International Scientific Journal
• Date: 2014

Authors

Ana Borges (Author) FEP; João Correia-da-Silva (Author) FEP; Didier Laussel (Author) Other

Journal

Title: Journal of Economics/ Zeitschrift fur Nationalokonomie

Pages: 1-26

ISSN: 0931-8658

Publisher: Springer Nature

Indexing

ISI Web of Knowledge - 3 Citations

ISI Web of Science

Scopus - 3 Citations

Econlit

Scientific classification

FOS: Social sciences > Economics and Business

CORDIS: Social sciences > Economics

Other information

Authenticus ID: P-008-ND0

DOI: 10.1007/s00712-012-0325-1

Abstract (EN): We obtain the optimal contract for the government (principal) to regulate a manager (agent) who has a taste for empire-building that is his/her private information. This taste for empire-building is modeled as a utility premium that is proportional to the difference between the contracted output and a reference output. We find that output is distorted upward when the manager's taste for running large firms is weak, downward when it is strong, and equals a reference output when it is intermediate (in this case, the participation constraint is binding). We also obtain an endogenous reference output (equal to the expected output, which depends on the reference output), and find that the response of output to cost is null in the short-run (in which the reference output is fixed), whenever the manager's type is in the intermediate range, and negative in the long-run (after the adjustment of the reference output to equal expected output). © 2012 Springer-Verlag Wien.

Language: English

Type (Professor's evaluation): Scientific