Separation of Ownership and Control : Delegation as a Commitment Device

This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker for providing eff ort to complete a project. The worker's eff ort determines the probability that the project is completed on time, but the worker receives unobservable bene fits for every period she is employed. We show that hiring a manager on a short-term contract may increase the firm value and we identify the conditions under which separation of ownership and control is optimal. The model is consistent with empirical fi ndings