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Long-Term Contracts, Short-Term Investment and Monitoring

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Author Info
von Thadden, Ernst-Ludwig

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Abstract

This paper presents a dynamic contracting model of myopic firm behavior caused by the fear of early project termination by outside investors. Although the parties can conclude long-term contracts, asymmetric information between investors and firms can make it impossible to implement profitable long-term projects. The paper characterizes the structure of optimal, renegotiation-proof debt contracts for unmonitored and monitored finance. Monitoring by investors, although itself subject to distorting incentive constraints, is shown to be able to overcome the short-term bias of investment and thus to lengthen the firms' planning horizon. Copyright 1995 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 62 (1995)
Issue (Month): 4 (October)
Pages: 557-75
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Handle: RePEc:bla:restud:v:62:y:1995:i:4:p:557-75

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