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Long-Term Contracts, Short-Term Investment and Monitoring

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  • Ernst-Ludwig von Thadden

Abstract

The paper presents a dynamic contracting model of myopic firm behaviour caused by the fear of early project termination by outside investors. Although the parties can conclude longterm contracts, asymmetric information between investors and firms can make it impossible to implement profitable long-term projects. The paper characterizes the structure of optimal, renegotiation-proof contracts for unmonitored and monitored finance. Monitoring by investors, although itself subject to distorting incentive constraints, is shown to be able to overcome the short-term bias of investment and thus to lengthen the firms' planning horizon.

Suggested Citation

  • Ernst-Ludwig von Thadden, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 557-575.
  • Handle: RePEc:oup:restud:v:62:y:1995:i:4:p:557-575.
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    File URL: http://hdl.handle.net/10.2307/2298077
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