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The Commitment of Finance, Duplicated Monitoring and the Investment Horizon

  • Ernst-Ludwig von Thadden

The paper presents a simple model of financial contracting for a long-term investment project in which early project termination may be an optimal response to information asymmetries. The paper characterizes when this constellation leads to inefficient short- term investment. It is shown that in this setting delegated monitoring is problematic because it creates a commitment problem for the investor. This yields a countervailing effect to the scale economies inherent in the delegation of monitoring. It is shown that contracting with more than one investor can provide an informational insurance to the firm which lengthens its planning horizon.

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Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ. in its series CEPR Financial Markets Paper with number 0027.

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Date of creation: Dec 1992
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Availability: in print
Handle: RePEc:cpr:ceprfm:0027
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