Third Party Monitoring and Golden Parachutes
When today’s actions can affect tomorrow's value of an asset and when the principal does not have access to hard information, either about productive activity or monitoring activity, two incentive problems must be simultaneously solved: first, the ‘ex-ante’ moral hazard problem of inducing higher productive effort from the agent; second, the ‘ex-post’ problem of inducing auditing and revelation of information from the auditor. Somewhat surprisingly, the first best can be attained in the negative externality (higher effort decreases the expected future quality of the asset) case: it is enough for the principal to commit to reallocate the right to use the asset at the end of the first period. In the positive externality case (when higher effort increases the future expected quality of the asset) a change in the rights to use the asset is no longer sufficient for efficiency in the second best situation. Rather, auditing by a potential entrant becomes necessary and a mix of property rights reallocation and transfers is necessary to solve the two incentive problems. We show that the second best optimal takes the form of a generalized ‘golden parachute’ contract where for high outputs the agent is replaced by the third party and leaves with a fixed compensation.
|Date of creation:||May 2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Sobel, Joel, 1993. "Information Control in the Principal-Agent Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 259-69, May.
- Jean-Jacques Laffont & Jean Tirole, 1988.
"Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers,"
RAND Journal of Economics,
The RAND Corporation, vol. 19(4), pages 516-537, Winter.
- Laffont, J. J. & Tirole, J., 1988. "Repeated Auctions of Incentive Contracts, Investment and Bidding Parity with an Application to Takeovers," Working Papers 675, California Institute of Technology, Division of the Humanities and Social Sciences.
- Jean Tirole & Jean-Jaques Laffont, 1987. "Repeated Auctions of Incentive Contracts, Investment and Bidding Parity With an Application to Takeovers," Working papers 463, Massachusetts Institute of Technology (MIT), Department of Economics.
- Nicola Persico, 1997.
"Information Acquisition in Auctions,"
UCLA Economics Working Papers
762, UCLA Department of Economics.
- Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
- Linn, Scott C. & McConnell, John J., 1983. "An empirical investigation of the impact of `antitakeover' amendments on common stock prices," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 361-399, April.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- Stole, Lars A., 1994. "Information expropriation and moral hazard in optimal second-source auctions," Journal of Public Economics, Elsevier, vol. 54(3), pages 463-484, July.
- C. Choe, 1998. "A mechanism design approach to an optimal contract under ex ante and ex post private information," Review of Economic Design, Springer, vol. 3(3), pages 237-255.
- Schnitzer, Monika, 1995.
""Breach of Trust" in Takeovers and the Optimal Corporate Charter,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 43(3), pages 229-59, September.
- Schnitzer, M., 1992. "Breach of Trust in Takeovers and the Optimal Corporate Charter," Working papers 92-10, Massachusetts Institute of Technology (MIT), Department of Economics.
- Schnitzer, Monika, 1995. "\"Breach of Trust\" in Takeovers and the Optimal Corporate Charter," Munich Reprints in Economics 19896, University of Munich, Department of Economics.
- Nöldeke, Georg & Schmidt, Klaus M., 1995.
"Option contracts and renegotiation: A solution to the Hold-Up Problem,"
Munich Reprints in Economics
19329, University of Munich, Department of Economics.
- Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
- Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
- Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2777. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.