Advanced Search
MyIDEAS: Login

Separation of functions, Collusion and Supervisors Financial Participation

Contents:

Author Info

Abstract

We derive the optimal principal-supervisor-agent relationship in an incomplete contract setting. We show that while having a three-layer structure with full separation of tasks has no efficiency consequence under a complete contract, it becomes crucial under an incomplete contract and can even lead to a result of irrelevance of the contractual incompleteness. When it is not possible to achieve this outcome, managers non-compliance arises as equilibrium behaviour despite the presence of complying supervisors. However, although always more efficient relative to a bilateral structure, the three-layer structure is prone to collusion and renegotiation. We show that the response to such drawback is to involve financially the supervisor into the venture, with the extent of the participation depending on how costly it is to collude and renegotiate the contract terms. Last, we derive the welfare properties of the various contract forms showing that they depend on the relative scarcity of each form of financing (monitoring/non monitoring), on transaction costs of collusion and on the distribution of cash flows relative to the project size. This allows us to derive the conditions for the emergence of a bilateral structure in which the financing and supervisory task are centralised on to the same subject and to argue that riskier firms, with high risk of collusive behaviour, are more likely to be financed by a single monitoring lender and thus face a higher cost of credit.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.csef.it/WP/wp109.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 109.

as in new window
Length:
Date of creation: 01 Nov 2003
Date of revision:
Handle: RePEc:sef:csefwp:109

Contact details of provider:
Postal: I-80126 Napoli
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Email:
Web page: http://www.csef.it/
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  2. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
  3. Strausz, Roland, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 337-57, July.
  4. A. Menichini & P. Simmons, . "Can Liars Ever Prosper," Discussion Papers 02/10, Department of Economics, University of York.
  5. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  6. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:109

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.