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Endogenous residual claimancy by vertical hierarchies

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  • Piccolo, Salvatore
  • Gonzalez, Aldo
  • Martina, Riccardo

Abstract

In this note we study a model of vertical hierarchies where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions. We show that the (equilibrium) allocation of residual claimancy may be affected by production externalities across hierarchies in a non-trivial manner. Specifically, although revenue-sharing contracts foster agents’ (non-contractible) surplus enhancing effort, we show that principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient (high-cost) types. This is because reducing the surplus share of those types reduces the information rent given up to efficient (low-cost) types by means of a ‘generalized competing contracts’ effect.

Suggested Citation

  • Piccolo, Salvatore & Gonzalez, Aldo & Martina, Riccardo, 2014. "Endogenous residual claimancy by vertical hierarchies," Economics Letters, Elsevier, vol. 122(3), pages 423-427.
    • Handle: RePEc:eee:ecolet:v:122:y:2014:i:3:p:423-427
    DOI: 10.1016/j.econlet.2014.01.001
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    References listed on IDEAS

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    1. Fiocco, Raffaele, 2016. "The strategic value of partial vertical integration," European Economic Review, Elsevier, vol. 89(C), pages 284-302.

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