Tensions in Practice: Later control changes earlier investment¶
Two partners investing before an unspecified decision
Imagine partners A and B who can each make a separate, non-contractible preparation costing 3. Each preparation would create 6 units of later value. Their agreement deliberately leaves the later use decision to one residual controller. A binding governance rule guarantees the preparer 2; the controller decides the remaining 4 and, in this toy model, keeps it. If the preparer is also the controller, they retain all 6. Each invests only when their own resulting return exceeds 3. Changing later control changes which earlier preparation is worthwhile.
Protect A’s preparation
Let A retain the residual value that supports A’s earlier investment.
Protect B’s preparation
Let B retain the residual value that supports B’s earlier investment.
Why these aims pull against each other
The same residual authority protects its holder’s preparation while leaving the other party only the guaranteed share. Delegating the gap does not affect incentives only after the gap appears.
Choose an arrangement to see what changes and what remains difficult.
Compare the same rows across alternatives. Cells state explicit toy quantities, membership or permissions; colors do not supply additional meaning.
What this choice protects
What it costs
When it fits
Compare the arrangements
A controls later use
A would retain 6 from A’s own preparation, net 3 after cost. B would receive only the guaranteed 2 from B’s preparation, net −1. A invests; B does not.
| Own return | Return minus 3 | Invest | |
|---|---|---|---|
| A | 6 | +3 | Yes |
| B | 2 | −1 | No |
- What it protects
- A’s preparation is individually worthwhile under the specified later allocation.
- What it costs
- B’s distinct preparation is deterred; assigning authority to A does not protect every contributor.
- When it fits
- Plausible when A’s preparation is the crucial non-contractible input and the cost of losing B’s input is acceptable.
Illustration note: This is an editorial, deliberately bounded illustration. Its stated rules and any numbers are invented, not observations, recommended settings, or predictions.
B controls later use
B would retain 6 from B’s own preparation, net 3 after cost. A would receive only the guaranteed 2 from A’s preparation, net −1. B invests; A does not.
| Own return | Return minus 3 | Invest | |
|---|---|---|---|
| A | 2 | −1 | No |
| B | 6 | +3 | Yes |
- What it protects
- B’s preparation is individually worthwhile under the same allocation rule.
- What it costs
- A’s distinct preparation is deterred; moving authority redistributes the incentive problem rather than eliminating it.
- When it fits
- Plausible when B’s preparation is the crucial input and losing A’s input is acceptable.
Illustration note: This is an editorial, deliberately bounded illustration. Its stated rules and any numbers are invented, not observations, recommended settings, or predictions.
What this illustration does—and does not—establish
The source establishes the structural tension; the concrete alternatives and their conditional costs are editorial synthesis. No arrangement is a universal recommendation.
- The guaranteed floor, residual allocation, value and decision rule are invented. They are not a bargaining solution or a prediction of real partners’ behavior.
- The two preparations are distinct, separable opportunities. The noninvestor receives no value from their unrealized preparation.
- Alternative governance, shared authority or enforceable investment terms could change the incentives; this comparison isolates the assigned residual controller.
Source entries
Incomplete Contract
Incomplete contract Ex-Ante Investment versus Ex-Post Authority supplies the local tension. The setting, alternative arrangements, and stipulated consequences are editorial applications.
Ex-Ante Investment versus Ex-Post Authority
Residual control is exercised ex post, but the parties make relationship-specific investments ex ante, in anticipation of how that authority will be used. The tension is temporal: the handler's future discretion distorts present incentives.