Delegated Monitoring and Contracting

67 Pages Posted: 22 May 2018 Last revised: 2 Oct 2019

See all articles by Sebastian Gryglewicz

Sebastian Gryglewicz

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: October 1, 2019

Abstract

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

Suggested Citation

Gryglewicz, Sebastian and Mayer, Simon, Delegated Monitoring and Contracting (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3175528 or http://dx.doi.org/10.2139/ssrn.3175528

Sebastian Gryglewicz (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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