The influence of the public corporation structure on behavior within the firm

The separation of ownership and control in public corporations creates a variety of agency costs. This dissertation evaluates these costs by examining the relationships between owners and top managers and between top and middle managers. Models of public corporations are developed and analyzed using constrained, nonlinear optimization techniques.; The first part of the dissertation (chapter 2) demonstrates that a binding capital constraint reduces the moral hazard costs that shareholders bear as a result of their imperfect control of middle management. This result is used to show that the firm's cash distribution policy can be used to induce or tighten capital constraints, mitigating the moral hazard costs. This provides a new motivation for an optimal dividend policy or debt service level. The second part of the dissertation (chapters 3-5) considers the costs of moral hazard borne by the shareholders in dealing with the top manager. These costs are shown to fall when top management recognizes and responds to the reactions of subordinates to its decisions. Chapters 3 and 4 focus on changes in the subordinate's effort level, while chapter 5 focuses on the subordinate's decision to leave the firm. A novel explanation emerges for the deployment of profit-sharing plans for employees at levels below top management.