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Monitoring a Common Agent: Implications for Financial Contracting

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Author Info
Fahad Khalil ()
David Martimort ()
Bruno Maria Parigi ()
Abstract

We study the problem of multiple principals who want to obtain income from a privately informed agent and design their contracts non-cooperatively. Our analysis reveals that the degree of coordination between principals has strong implications for the shapes of contracts and the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals are able to coordinate monitoring or verify each others’ monitoring efforts. When this is not possible, free riding in monitoring weakens the incentive to monitor, so that flat payments, debt-like contracts and very low levels of monitoring appear. Free riding may be so strong that there may even be less monitoring than if the principals cooperated with each other, which shows that non-cooperative monitoring does not necessarily lead to excessive monitoring.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1514.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1514

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Related research
Keywords: monitoring common agency costly state verification

Find related papers by JEL classification:
D20 - Microeconomics - - Production and Organizations - - - General
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G20 - Financial Economics - - Financial Institutions and Services - - - General
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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