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Costly monitoring, dynamic incentives, and default

Antinolfi, Gaetano and Carli, Francesco 2015, Costly monitoring, dynamic incentives, and default, Journal of economic theory, vol. 159, no. Part A, pp. 105-119, doi: 10.1016/j.jet.2015.05.011.

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Title Costly monitoring, dynamic incentives, and default
Author(s) Antinolfi, Gaetano
Carli, FrancescoORCID iD for Carli, Francesco orcid.org/0000-0001-9594-4706
Journal name Journal of economic theory
Volume number 159
Issue number Part A
Start page 105
End page 119
Total pages 15
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2015-09
ISSN 0022-0531
1095-7235
Keyword(s) Costly state verification
Default
Dynamic contracts
Monitoring
Moral hazard
Summary We study dynamic contracts between a lender and a borrower in the presence of costly state verification and hidden effort. We prove three results. Costly monitoring is employed by the lender to optimally limit history dependence and prevent future inefficient termination of the relationship. Due to interaction between costly monitoring and dynamic incentives, the probability of monitoring may fail to be monotone in the borrower's reservation utility. Finally, following the interpretation of the costly state verification literature, we distinguish two levels of bankruptcy: one associated with restructuring and the other with liquidation.
Language eng
DOI 10.1016/j.jet.2015.05.011
Field of Research 140104 Microeconomic Theory
Socio Economic Objective 910299 Microeconomics not elsewhere classified
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2015, Elsevier
Persistent URL http://hdl.handle.net/10536/DRO/DU:30079051

Document type: Journal Article
Collection: Department of Economics
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