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Random monitoring in financing relationships

  • Hind Sami


    (COACTIS - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne)

This paper examines a financier's optimal monitoring intensity in a multi-period financing relationship.We identify conditions under which the financier should sometimes misidentify the quality of an entrepreneur. Such an imperfect evaluation technology affects action choices by bad entrepreneurs. We first characterize the optimal monitoring intensity and show that it is one in which the investor monitors entrepreneurs randomly. Random monitoring in the first stage of a relationship induces bad entrepreneurs to reveal their intrinsic types. Second, because random monitoring reduces the share of bad entrepreneurs in the subsequent periods, we show that the financier can therefore realize substantial gains.

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Paper provided by HAL in its series Post-Print with number halshs-00522629.

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Date of creation: 2009
Date of revision:
Publication status: Published in The quarterly Review of Economics and Finance, 2009, pp.239-252. <10.1016/j.qref.2007.09.009>
Handle: RePEc:hal:journl:halshs-00522629
DOI: 10.1016/j.qref.2007.09.009
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