A Dilemma Of Controlling Insider Control

Insider Control is a serious problem of corporation governance no matter in developing ordeveloped countries. Traditional researches applied to the principal-agent theory to analyze thecause and the harm of insider control; consequently they provided some measures to control theinsider control. However, the traditional neglected a few of details in the enforcement ofcontrolling insider control, one of which is that why not the principal or shareholders punish theinsider immediately when the insider control occurs. We believe there is a dilemma confrontedwith the principal or shareholders, on one hand insider control may incur some losses to theprincipal, on the other hand controlling the insider strictly will also disincentive the insider. Wealso find that the dilemma exist extensively in the field of corporation governance.So we use and extend the multi-mission principal-agent model of Bengt Holmstrom to thedynamic and uncertain vision, which will help to interpret the dilemma of controlling insidercontrol. Because the insider assumes many missions, some of which is unobservable, if theprincipal restraints the insider strictly, it will produce distorted incentives for the insider on othermissions. In the long-run term, the dilemma can be offset partly, because the insider will considerhis long-run interest. The extent of the incentive enforce by the principal always depend on therisk preference of the insider.