Stairway to heaven or highway to hell: Liquidity, sweat equity, and the uncertain path to ownership
We study a setting in which a principal contracts with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and privately observes the sequence of cost realizations. We formulate the principal's problem as a dynamic program in which the state variable is the agent's continuation utility, which is naturally interpreted as his equity in the firm. The optimal incentive scheme resembles what is commonly regarded as a sweat equity contract, with all rents back loaded. Payments begin when the agent effectively becomes the owner, and from this point on, all production is efficient. These features are shown to be similar to features common in real-world work-to-own franchising agreements and venture capital contracts. © 2013, RAND.
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- Economics
- 3803 Economic theory
- 3802 Econometrics
- 3801 Applied economics
- 14 Economics
Citation
DOI
Publication Date
Start / End Page
Related Subject Headings
- Economics
- 3803 Economic theory
- 3802 Econometrics
- 3801 Applied economics
- 14 Economics