The form of loan contract with risk neutrality and no commitment

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The form of loan contract with risk neutrality and no commitment

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Peter J. Simmons
G. Garino

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Gaia Garino

Abstract

This paper considers the joint investment and labour contracts (employment and wage compensation) for a firm which has private information over its expost revenues. There is costly state observation for investors in the firm; workers can free ride on any investors state observation. The commitment contract uses random investor auditing to prevent the firm cheating. Without commitment auditing by investors (possibly random) and cheating by the firm (possibly random) are chosen in a Nash equilibrium after the contract specifying loan size, employment and state contingent repayments has been signed. A main result is that without commitment there is a negative correlation of wage and investor compensation and that there may be first best levels of employment and investment.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 00/35.

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Handle: RePEc:yor:yorken:00/35

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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.:

Choe, Chongwoo, 1998. "Contract design and costly verification games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 327-340, February. [Downloadable!] (restricted)
Other versions:
- Choe, C., 1995. "Contract Desing and Costly Verification Games," Papers 95.18, La Trobe - Department of Economics.
Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
Other versions:
- 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. [Downloadable!] (restricted)

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This page was last updated on 2009-12-14.

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