Are two investors better than one?
AbstractThis paper compares the optimal investor repayment contracts of a firm which has private information over its expost revenues when the finance can be provided by a single or by two investors (say a big shareholder and a group of small dispersed shareholders). Costly monitoring can be carried out by those investors who have a larger stake into the contract. When they are the only investors we use the Khalil-Parigi financial contract with non-contractible monitoring, in which the probabilities of cheating by the firm and monitoring by investors are mutual best responses. The contract is written by the firm knowing that this equilibrium will subsequently occur. With a second group of investors who have no monitoring rights, cheating and monitoring probabilities are chosen in a similar way. The small shareholders learn the results of any monitoring for free. A main result is that without commitment there is a negative correlation between repayments to the two investor groups: the contract uses the small group to smooth out the repayments of the firm optimally. This reduces the incentive for the firm to make false reports and mitigates the investor's incentive to monitor. A second result is that the two investor scenario is Pareto superior to the single investor model. A third result is that the possible extent of this smoothing depends on whether the investors have limited liability; it is found that in some circumstances investors should make repayments to the firm rather than receive them.
Download InfoIf 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.
Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 71.
Date of creation: 01 Oct 2001
Date of revision:
contracts; multiple investors; no commitment;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-11-21 (All new papers)
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.:
- Townsend, Robert M., 1979.
"Optimal contracts and competitive markets with costly state verification,"
Journal of Economic Theory,
Elsevier, vol. 21(2), pages 265-293, October.
- Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- Khalil, Fahad & Lawarree, Jacques, 1995. "Collusive Auditors," American Economic Review, American Economic Association, vol. 85(2), pages 442-46, May.
- Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
- Jean Tirole, 1985. "Hierarchies and Bureaucracies," Working papers 363, Massachusetts Institute of Technology (MIT), Department of Economics.
- Strausz, Roland, 1997.
"Delegation of Monitoring in a Principal-Agent Relationship,"
Review of Economic Studies,
Wiley Blackwell, vol. 64(3), pages 337-57, July.
- Strausz, R., 1995. "Delegation of Monitoring in a Principal-Agent Relationship," Discussion Paper 1995-60, Tilburg University, Center for Economic Research.
- Mathias Dewatripont, 1988.
"Commitment through renegotiation-proof contacts with third parties,"
ULB Institutional Repository
2013/9569, ULB -- Universite Libre de Bruxelles.
- Dewatripont, Mathias, 1988. "Commitment through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 377-89, July.
- Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
- Lacker, Jeffrey M & Weinberg, John A, 1989.
"Optimal Contracts under Costly State Falsification,"
Journal of Political Economy,
University of Chicago Press, vol. 97(6), pages 1345-63, December.
- Lacker, J.M., 1989. "Optimal Contracts Under Costly State Falsification," Purdue University Economics Working Papers 956, Purdue University, Department of Economics.
- Chongwoo Choe, 1995.
"Contract Design and Costly Verification Games,"
1995.18, School of Economics, La Trobe University.
- Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
- Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
- Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
- Martimort, David, 1996.
"The multiprincipal nature of government,"
European Economic Review,
Elsevier, vol. 40(3-5), pages 673-685, April.
- 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.
- Karel Janda, 2007. "Optimal Debt Contracts in Emerging Markets with Multiple Investors," Prague Economic Papers, University of Economics, Prague, vol. 2007(2), pages 115-129.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio).
If references are entirely missing, you can add them using this form.