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Optimal Capital Structure in Agency Relationships

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  • Tracy R. Lewis
  • David E.M. Sappington

Abstract

We analyze the optimal design of capital structure in agency relationships. When a risk-averse principal controls the agent's capital structure, she awards a larger equity stake to outsiders the smaller the agent's productivity. When she controls both the timing and the terms of the agent's financing, the principal shifts to equityholders all risk associated with stochastic production and with the agent's unknown productivity. When the principal dictates only the terms of financing, only the former risk is borne by equityholders. When the principal is sufficiently averse to risk, she affords the agent no choice among incentive schemes.

Suggested Citation

  • Tracy R. Lewis & David E.M. Sappington, 1995. "Optimal Capital Structure in Agency Relationships," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 343-361, Autumn.
    • Handle: RePEc:rje:randje:v:26:y:1995:i:autumn:p:343-361
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    Cited by:

    1. Carlo Cambini & Yossi Spiegel, 2016. "Investment and Capital Structure of Partially Private Regulated Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 487-515, April.
    2. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    3. Celik, Gorkem, 2004. "Counter Marginalization of Information Rents under Collusion," Microeconomics.ca working papers celik-04-01-23-02-48-07, Vancouver School of Economics, revised 27 Jan 2008.
    4. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    5. Iossa, Elisabetta & Martimort, David, 2016. "Corruption in PPPs, incentives and contract incompleteness," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 85-100.
    6. Malin Arve & David Martimort, 2016. "Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts," American Economic Review, American Economic Association, vol. 106(11), pages 3238-3274, November.
    7. Oliver Dürr & Markus Nisch & Anna Rohlfing-Bastian, 2020. "Incentives in optimally sized teams for projects with uncertain returns," Review of Accounting Studies, Springer, vol. 25(1), pages 313-341, March.
    8. Lewis, Tracy R. & Sappington, David E. M., 1999. "Access pricing with unregulated downstream competition," Information Economics and Policy, Elsevier, vol. 11(1), pages 73-100, March.
    9. Arve, Malin, 2014. "Procurement and predation: Dynamic sourcing from financially constrained suppliers," Journal of Public Economics, Elsevier, vol. 120(C), pages 157-168.
    10. Nicol'as Hern'andez Santib'a~nez & Dylan Possamai & Chao Zhou, 2017. "Bank monitoring incentives under moral hazard and adverse selection," Papers 1701.05864, arXiv.org, revised Jan 2019.
    11. Spiegel, Yossi & Cambini, Carlo, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers 8508, C.E.P.R. Discussion Papers.
    12. Deneckere, Raymond & de Palma, André & Leruth, Luc, 2019. "Risk sharing in procurement," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 173-220.
    13. Nicolás Hernández Santibáñez & Dylan Possamaï & Chao Zhou, 2020. "Bank monitoring incentives under moral hazard and adverse selection," Post-Print hal-01435460, HAL.
    14. Elisabetta Iossa & David Martimort, 2011. "The Theory of Incentives Applied to the Transport Sector," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 29, Edward Elgar Publishing.
    15. Fay, Marianne & Martimort, David & Straub, Stéphane, 2021. "Funding and financing infrastructure: The joint-use of public and private finance," Journal of Development Economics, Elsevier, vol. 150(C).
    16. Carlos CONTRERAS & Julio ANGULO, 2016. "How Do Credit Spreads Affect Risk Allocation In Public Ï¿½ Private Partnerships?," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 9(9), pages 63-79, June.
    17. David Martimort & Flavio Menezes & Myrna Wooders & DANIEL DANAU & ANNALISA VINELLA, 2015. "Public-Private Contracting under Limited Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 78-110, February.
    18. Nicolás Hernández Santibáñez & Dylan Possamaï & Chao Zhou, 2017. "Bank monitoring incentives under moral hazard and adverse selection," Working Papers hal-01435460, HAL.
    19. repec:bri:cmpowp:13/325 is not listed on IDEAS
    20. Hailu, Getu & Goddard, Ellen W. & Jeffrey, Scott R., 2005. "Do Decision Makers' Debt-risk Attitudes Affect the Agency Costs of Debt?," CAFRI: Current Agriculture, Food and Resource Issues, Canadian Agricultural Economics Society, issue 6, pages 1-18, May.
    21. Basov Suren & Yin Xiangkang, 2010. "Optimal Screening by Risk-Averse Principals," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-25, March.
    22. Jamison, Mark & Mandy, David M. & Sappington, David E.M., 2014. "Motivating regulated suppliers to assess alternative technologies, protocols, and capital structures," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 13-22.
    23. Christophe Gence-Creux, 2000. "Regulation with a Risk-Averse Principal," Econometric Society World Congress 2000 Contributed Papers 0588, Econometric Society.
    24. Spier, Kathryn E. & Sykes, Alan O., 1998. "Capital structure, priority rules, and the settlement of civil claims," International Review of Law and Economics, Elsevier, vol. 18(2), pages 187-200, June.
    25. Samuel Nduati Kariuki & Charles Guandaru Kamau, 2014. "Determinants of Corporate Capital Structure among Private Manufacturing Firms in Kenya: A Survey of Food and Beverage Manufacturing Firms," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(3), pages 49-62, July.

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