Optimal Distribution of Earnings between Partners in Family Firm Contracting

Abstract

We use principal-agent analysis to examine the distribution of earnings within family firms in a moral-hazard environment. Our analysis incorporates three special characteristics of family firms: owner-managereforts and responsibilities, co-ownership with one or more family members, and financial and family-oriented goal conflicts. We analyze how these special characteristics interact to shape the optimal distribution of earnings between owner-managers. Moreover, we investigate cooperative and non-cooperative mechanisms that affect the design of incentive contracts and the distribution of earnings. Our analysis provides analytically derived insights into the impact of different corporate governance mechanisms in family firms.