Motivating wealth-constrained actors

Abstract

We examine how owners of productive resources (e.g., public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit - the resource owner always shares the operator's profit; (2) dispersed enterprise ownership -resources are widely distributed among operators of varying ability; (3) limited benefits of competition - the owner may not benefit from increased competition for the resource; and, sometimes, (4) diluted incentives for the most capable - more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored. (JEL D82, D44, D20).