Monitoring a common agent: Implications for financial contracting

Multiple principals want to obtain income from a privately informed agent and design their contracts non-cooperatively. The degree of coordination between principals shapes the contracts and affects the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals coord...

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Bibliographic Details
Published in:Journal of economic theory 2007-07, Vol.135 (1), p.35-67
Main Authors: Khalil, Fahad, Martimort, David, Parigi, Bruno
Format: Article
Language:English
Subjects:
Agency
Common agency
Contracts
Cooperation
Costly state verification
Economic theory
Financial economics
Free riding
Monitoring
Monitoring systems
Principal-agent theory
Studies
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Summary:Multiple principals want to obtain income from a privately informed agent and design their contracts non-cooperatively. The degree of coordination between principals shapes the contracts and affects the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals coordinate or verify each other's monitoring efforts. When this is not possible, free riding weakens monitoring incentives, so that flat payments, debt-like contracts, and very low levels of monitoring appear. Free riding may be so strong to induce even less monitoring than if the principals cooperated with each other; that is, non-cooperative monitoring does not necessarily lead to excessive monitoring.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2005.08.010