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Third parties as an incentive to comply

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Abstract

Within an incomplete contract setting, the paper analyses the role of third parties in ameliorating incentive problems arising in the context of financial contracts with costly verification. Contrary to the findings of the bilateral lender-borrower relationship, characterised by no information revelation and a breakdown of the market, it is shown that, in the presence of third parties, an optimal contract exists and has partial information revelation. The importance of third parties is therefore not limited to improving efficiency, as it is when the contract offer comes from the informed party, but to ensure project realisation, and thus to ensure that the surplus that can arise from the project does not get lost

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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 41.

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Date of creation: 01 May 2000
Date of revision: 01 Jan 2006
Handle: RePEc:sef:csefwp:41

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Keywords: Bargaining power; contracts; costly state verification;

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  1. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, Octomber.
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