Arbeitspapier

Capital-labor distortions in project finance

An entrepreneur needs a lender's capital input to finance a project. The entrepreneur, who is privately informed about the project environment, provides a labor input (effort). Capital and labor are perfect complements. We show that the entrepreneur may optimally distort the project's capital-labor ratio. The direction of the distortion in capital-labor ratio depends on contractibility of the entrepreneur's labor input. If the entrepreneur's labor input is contractible, in the optimal contract, the entrepreneur may provide an excessive amount of labor for the amount of capital funded by the lender. If, by contrast, the entrepreneur's labor input is non-contractible, part of the physical asset funded by the lender may remain idle.

Language
Englisch

Bibliographic citation
Series: Working Paper Series ; No. 15-01

Classification
Wirtschaft
Asymmetric and Private Information; Mechanism Design
Economics of Contract: Theory
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Subject
Agency
Project Finance
Capital-Labor Ratio
Contractibility

Event
Geistige Schöpfung
(who)
Peitz, Martin
Shin, Dongsoo
Event
Veröffentlichung
(who)
University of Mannheim, Department of Economics
(where)
Mannheim
(when)
2015

Handle
URN
urn:nbn:de:bsz:180-madoc-373888
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Peitz, Martin
  • Shin, Dongsoo
  • University of Mannheim, Department of Economics

Time of origin

  • 2015

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