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The form of loan contract with risk neutrality and no commitment

Author

Listed:
  • Peter J. Simmons
  • G. Garino

Abstract

This paper considers the joint investment and labour contracts (employment and wage compensation) for a firm which has private information over its expost revenues. There is costly state observation for investors in the firm; workers can free ride on any investors state observation. The commitment contract uses random investor auditing to prevent the firm cheating. Without commitment auditing by investors (possibly random) and cheating by the firm (possibly random) are chosen in a Nash equilibrium after the contract specifying loan size, employment and state contingent repayments has been signed. A main result is that without commitment there is a negative correlation of wage and investor compensation and that there may be first best levels of employment and investment.

Suggested Citation

  • Peter J. Simmons & G. Garino, "undated". "The form of loan contract with risk neutrality and no commitment," Discussion Papers 00/35, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:00/35
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2000/0035.pdf
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    References listed on IDEAS

    as
    1. Choe, Chongwoo, 1998. "Contract design and costly verification games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 327-340, February.
    2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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