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Monitoring a Common Agent: implications for financial contracting

  • Fahad Khalil
  • Bruno Parigi
  • David Martimort

We study the problem of multiple principals who want to obtain income from a privately informed agent and design their contracts non-cooperatively. Our analysis reveals that the degree of coordination between principals has strong implications for the shapes of contracts and the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals are able to coordinate monitoring or verify each others’ monitoring efforts. When this is not possible, free riding in monitoring weakens the incentive to monitor, so that flat payments, debt-like contracts and very low levels of monitoring appear. Free riding may be so strong that there may even be less monitoring than if the principals cooperated with each other, which shows that non-cooperative monitoring does not necessarily lead to excessive monitoring.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2003-04-P.

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Date of creation: Nov 2007
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Publication status: Published in Journal of Economic Theory, Volume 135/1, 35-67, 2007
Handle: RePEc:udb:wpaper:uwec-2003-04-p
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