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Third parties as an incentive to comply

Within an incomplete contract setting, the paper analyses the role of third parties in ameliorating incentive problems arising in the context of financial contracts with costly verification. Contrary to the findings of the bilateral lender-borrower relationship, characterised by no information revelation and a breakdown of the market, it is shown that, in the presence of third parties, an optimal contract exists and has partial information revelation. The importance of third parties is therefore not limited to improving efficiency, as it is when the contract offer comes from the informed party, but to ensure project realisation, and thus to ensure that the surplus that can arise from the project does not get lost

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 41.

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Date of creation: 01 May 2000
Date of revision: 01 Jan 2006
Handle: RePEc:sef:csefwp:41
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  1. Kofman, F. & Lawarree, J., 1990. "Collusion in Hierarchical Agency," Discussion Papers in Economics at the University of Washington 91-01, Department of Economics at the University of Washington.
  2. Strausz, Roland, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 337-57, July.
  3. Persons, John C., 1997. "Liars Never Prosper? How Management Misrepresentation Reduces Monitoring Costs," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 269-306, October.
  4. Hoff, Karla & Stiglitz, Joseph E, 1990. "Imperfect Information and Rural Credit Markets--Puzzles and Policy Perspectives," World Bank Economic Review, World Bank Group, vol. 4(3), pages 235-50, September.
  5. A. Menichini & P. Simmons, . "Can Liars Ever Prosper," Discussion Papers 02/10, Department of Economics, University of York.
  6. Charles M. Kahn & Dilip Mookherjee, 1996. "Competition and Incentives with Non-Exclusive Contracts," Papers 0075, Boston University - Industry Studies Programme.
  7. Hoff, Karla & Stiglitz, Joseph E., 1998. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 55(2), pages 485-518, April.
  8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
  9. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  10. repec:ltr:wpaper:1995.18 is not listed on IDEAS
  11. Simmons, Peter & G Garino, 2003. "Truth-telling and the Role of Limited Liability in Costly State Verification Loan Contracts," Royal Economic Society Annual Conference 2003 188, Royal Economic Society.
  12. Chongwoo Choe, 1995. "Contract Design and Costly Verification Games," Working Papers 1995.18, School of Economics, La Trobe University.
  13. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-50, February.
  14. Menichini, A, 2001. "The Role of Bargaining Initiative under No Commitment to Audit," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(3), pages 303-12, August.
  15. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  16. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  17. Bloise, Gaetano & Reichlin, Pietro, 2005. "Risk and intermediation in a dual financial market economy," Research in Economics, Elsevier, vol. 59(3), pages 257-279, September.
  18. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  19. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
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