The One Period Problem of a Monopoly Incentive Compatible Equity and Debt-Linked Contracts
30 Pages Posted: 26 Apr 2003
Date Written: April 24, 2003
The paper studies what is the optimal financial vehicle that serves a monopoly best interest in nurturing his investees and at the same time can provide a socially optimal welfare. I demonstrate that it is the equity contract that serves the monopoly best interest because the profits it generates are higher than the profits derived from the collateral debt and convertible debt contract. In addition, I show that the equity contract is socially better than the debt-linked. I also show that neither equity nor debt-linked contracts are able to reveal the ability of the entrepreneur.
JEL Classification: G24, D82
Suggested Citation: Suggested Citation