Delegated Monitoring and Contracting
67 Pages Posted: 22 May 2018 Last revised: 2 Oct 2019
Date Written: October 1, 2019
We study a dynamic agency model in which investors finance a firm run by a manager and monitored by an intermediary. Both the manager and the intermediary are subject to moral hazard. In the optimal contract, incentives trickle down from the intermediary to the manager. Intermediation introduces option-like incentives and increases the manager's performance pay. Because agency conflicts at the intermediary and firm levels interact, intermediation is not suitable to deal with severe firm-level agency conflicts. Direct investor participation in firm governance makes incentives trickle up from the manager to the intermediary and further increases the strength of managerial incentives but reduces option-like features.
Keywords: Intermediation, Agency Conflicts, Incentives
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