Informational Rents and Residual Control Rights
Murali Agastya & Oleksii Birulin
Abstract: One agent, called the target, has an exclusive resource that may be combined with respective individual-specific human capital of any subset S, of a set of agents N. The aggregate output from a typical merger of S (with the target) depends on the physical synergies of human capital of those in S the business acumen of the “manager” assigned to run of the merger. Residual Control or “ownership” refers to the right to choose the merger and the manager. The design question is thus: What is the optimal allocation of ownership.
We address the above in a model an agent I's managerial ability v_i, and the value of her outside option, say w_i, are both her private information. In this two dimensional (but IPV) Bayesian Mechanism Design setting, we show that (a) it is impossible to achieve ex-post efficiency using a mediator – or equivalently through third-party ownership and (b) assigning ownership to the target is ex-ante efficient. A clean intuition based on the savings on the informational rents in incentive-compatible Bayesian mechanisms is offered for the results.