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
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Englisch
- Bibliographic citation
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Series: Working Paper Series ; No. 15-01
- Classification
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Wirtschaft
Asymmetric and Private Information; Mechanism Design
Economics of Contract: Theory
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- Subject
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Agency
Project Finance
Capital-Labor Ratio
Contractibility
- Event
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Geistige Schöpfung
- (who)
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Peitz, Martin
Shin, Dongsoo
- Event
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Veröffentlichung
- (who)
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University of Mannheim, Department of Economics
- (where)
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Mannheim
- (when)
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2015
- Handle
- URN
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urn:nbn:de:bsz:180-madoc-373888
- Last update
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10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Peitz, Martin
- Shin, Dongsoo
- University of Mannheim, Department of Economics
Time of origin
- 2015