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Third Parties, Information Disclosure And Monitoring Incentives

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  • Anna Maria C. Menichini

Abstract

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 and lender's bargaining power. Contrary to the findings of the bilateral lender–borrower relationship, characterised by no information revelation and possibly a breakdown of the market, it is shown that, in the presence of third parties, an optimal contract exists featuring partial information revelation and random monitoring. 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.

Suggested Citation

  • Anna Maria C. Menichini, 2008. "Third Parties, Information Disclosure And Monitoring Incentives," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(1), pages 31-50, February.
    • Handle: RePEc:bla:scotjp:v:55:y:2008:i:1:p:31-50
    DOI: 10.1111/j.1467-9485.2008.00445.x
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    References listed on IDEAS

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