Working Paper: CEPR ID: DP12355
Authors: Emre Ozdenoren; Oleg Rubanov
Abstract: We model a firm as a team production process subject to moral hazard and derive the optimal profit sharing scheme between productive workers and outside investors together with incentive contracts based on noisy performance signals. More productive agents with noisier performance signals are more likely to receive shares which can explain why managers are motivated by shares, and law or consulting firms form partnerships. A firm that grows by opening branches is held almost entirely by outside investors when its output noise grows faster than the number of branches. Otherwise, insiders hold substantial amount of a large firm’s shares.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity (O49) | Share Allocation (G34) |
| Signal Noise (C58) | Share Allocation (G34) |
| Share Allocation (G34) | Worker Motivation (M54) |
| Firm Size (L25) | Ownership Shift towards Outside Investors (G34) |
| Output Noise (C67) | Ownership Shift towards Outside Investors (G34) |
| Profit Sharing (G35) | Worker Incentives (J33) |
| Profit Sharing (G35) | Output Risk (C67) |