Monitoring a Common Agent: Implications for Financial Contracting

46 Pages Posted: 2 Sep 2005

See all articles by Bruno Maria Parigi

Bruno Maria Parigi

University of Padua - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Fahad Khalil

University of Washington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2005

Abstract

We study the problem of multiple principals who want to obtain income from a privately informed agent and design their contracts non-cooperatively. Our analysis reveals that the degree of coordination between principals has strong implications for the shapes of contracts and the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals are able to coordinate monitoring or verify each others' monitoring efforts. When this is not possible, free riding in monitoring weakens the incentive to monitor, so that flat payments, debt-like contracts and very low levels of monitoring appear. Free riding may be so strong that there may even be less monitoring than if the principals cooperated with each other, which shows that non-cooperative monitoring does not necessarily lead to excessive monitoring.

Keywords: monitoring, common agency, costly state verification

JEL Classification: D2, D8, G2, G3

Suggested Citation

Parigi, Bruno Maria and Khalil, Fahad and Martimort, David, Monitoring a Common Agent: Implications for Financial Contracting (August 2005). CESifo Working Paper Series No. 1514. Available at SSRN: https://ssrn.com/abstract=796627

Bruno Maria Parigi (Contact Author)

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Fahad Khalil

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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