Journal of Economics

, Volume 111, Issue 2, pp 105–130 | Cite as

Regulating a manager whose empire-building preferences are private information

  • Ana Pinto Borges
  • João Correia-da-Silva
  • Didier Laussel
Article

Abstract

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).

Keywords

Procurement Regulation Adverse selection Empire-building Reservation utility 

JEL Classification

D82 H42 H51 I11 

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Copyright information

© Springer-Verlag Wien 2012

Authors and Affiliations

  • Ana Pinto Borges
    • 1
  • João Correia-da-Silva
    • 2
  • Didier Laussel
    • 3
  1. 1.Núcleo de Investigação do Instituto Superior de Administração e Gestão (NIDISAG)PortoPortugal
  2. 2.Faculdade de Economia, CEF.UPUniversidade do PortoPortoPortugal
  3. 3.Aix-Marseille Université (AMSE), GREQAM, CNRS & EHESSLes MillesFrance

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