Managerial Ownership with Rent-Seeking Employees

Abstract

The traditional agency problem advocates 100 percent share ownership when managers are risk-neutral, and managers either have enough wealth to buy the firm outright or have access to perfect capital markets. This paper says that delegation to the disinterested managers may sometimes explain the separation of ownership and control even before one considers diversification motives or credit market imperfections. High levels of CEO share ownership may induce rent-seeking employees to behave badly. Delegation to disinterested managers, with lower levels of share ownership, makes firms more valuable than retaining CEO-level agents that think like 100 percent owners.

Keywords: CEO compensation, contracts, corporate control, shareholders, rent-seeking, and unions

JEL Classification: D23, G34