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Optimal Multilateral Contracts

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  • Krasa, Stefan
  • Villamil, Anne P
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    Abstract

    The purpose of this paper is to derive the structure of optimal multilateral contracts in a costly state verification model with multiple agents who may be risk averse and need not be identical. We consider two different verification technology specifications. When the verification technology is deterministic, we show that the optimal contract is a multilateral debt contract in the sense that the monitoring set is a lower interval. When the verification technology is stochastic, we show that transfers and monitoring probabilities are decreasing functions of wealth. The key economic problem in this environment is that optimal contracts are interdependent. We are able to resolve this interdependency problem by using abstract measure theoretic tools.

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 4 (1994)
    Issue (Month): 2 (March)
    Pages: 167-87

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    Handle: RePEc:spr:joecth:v:4:y:1994:i:2:p:167-87

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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Cited by:
    1. Marco Bassetto & Christopher Phelan, 2008. "Tax Riots," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 649-669.
    2. Hvide, Hans K & Leite, Tore, 2007. "Optimal Debt Contracts under Costly Enforcement," CEPR Discussion Papers 6040, C.E.P.R. Discussion Papers.
    3. Villamil, Anne P., 2003. "Introduction to capital accumulation and allocation in economic growth," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(4), pages 583-591.
    4. Podczeck, Konrad & Yannelis, Nicholas C., 2008. "Equilibrium theory with asymmetric information and with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 141(1), pages 152-183, July.
    5. M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO.
    6. Elizabeth Asiedu & Yi Jin & Anne Villamil, 2006. "Do lack of transparency and enforcement undermine international risk-sharing?," Annals of Finance, Springer, vol. 2(2), pages 123-140, March.
    7. Tan, Liang, 2013. "Creditor control rights, state of nature verification, and financial reporting conservatism," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 1-22.
    8. Zeng, Zhixiong, 2011. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," MPRA Paper 33471, University Library of Munich, Germany.
    9. Waly Wane, 2002. "Income Taxation and Tax Evasion in a Finite Economy," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 407-431, November.
    10. Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Paper 9415, Federal Reserve Bank of Cleveland.
    11. Antinolfi, Gaetano & Kawamura, Enrique, 2008. "Banks and markets in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 321-334, March.

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