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Monitoring, Moral Hazard and Limited Liability

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Abstract

Cet article analyse les propriétés de complémentarité et de substituabilité entre systèmes de surveillance et mécanismes incitatifs dans une relation principal-agent, lorsque les parties sont neutres à l'égard du risque et que l'agent fait face à une contrainte de solvabilité. À partir d'un critère permettant un classement complet des mécanismes de surveillance dans le contexte du modèle, nous déterminons le mielleur mécanisme surveillance-incitations pour une fonction donnée de coûts de surveillance. Nous montrons que, lorsque l'effort de surveillance du principal est endogène, la contrainte de solvabilité de l'agent est toujours saturée et nous analysons les effets de statique comparative, relativement au niveau de surveillance et au niveau de la rente laissée à l'agent, d'une modification de la limite de solvabilité de l'agent, de l'effort que le principal requiert de l'agent et de la fonction de coût de surveillance. The paper analyses the trade-off and complementarity between monitoring and incentives in a principal-agent model with risk-neutral parties where the agent faces a limited liability constraint. A criterion is introduced which allows a complete ranking of monitoring processes in the context of the model. This result is used to characterize the best monitoring-and-incentive scheme, given a particular monitoring cost function. We show that with endogenous monitoring the limited liability constraint is always binding and derive the comparative static effects, with respect to the agent's rent and the optimal monitoring level, of changes in the agent's liability limit, in the effort required from the agent and in monitoring costs.

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Bibliographic Info

Paper provided by Université du Québec à Montréal, Département des sciences économiques in its series Cahiers de recherche du Département des sciences économiques, UQAM with number 9508.

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Date of creation: Jul 1995
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Handle: RePEc:cre:uqamwp:9508

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Cited by:
  1. Chalmers, Keryn & Godfrey, Jayne M., 2004. "Reputation costs: the impetus for voluntary derivative financial instrument reporting," Accounting, Organizations and Society, Elsevier, vol. 29(2), pages 95-125, February.

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