Monitoring a Common Agent

Abstract

We study the problem of multiple financiers who want to extract income from a privately informed agent and design their financial contracts non-cooperatively. Our analysis reveals that the degree of coordination between financiers has strong implications for the shapes of financial contracts. Equity like contracts and excessive monitoring emerge when principals are able to delegate monitoring or verify each others monitoring efforts. When this is not possible, free riding in monitoring weakens the incentive to monitor high profit levels, so that flat payments, debt-like contracts and very low levels of monitoring appear.

Keywords: monitoring, common agency, costly state verification

JEL Classification: D8, G2, G3