Séminaire

Dynamic contracting under soft information.

Guillaume Roger (University of Wollongong )

27 juin 2019, 12h30–14h45

Toulouse

Salle MF 323

Finance Seminar

Résumé

A principal delegates the running of a project to an agent subject to moral hazard over an innite horizon, and cannot observe any of the outcomes. The agent sends reports at each instant t; naturally reports may be manipulated. Eliciting truthful revelation is necessary to the provision of eort, and is achievable by using audits and penalties. It requires that the continuation value of the agent be kept large enough, and the agent be terminated below a threshold; she receives an endogenous information rent. That rent is completely determined by the parameters of the moral hazard problem. The optimal audit trades o the expected audit cost again postponing termination by lowering the information rent. The contract is implemented in standard nancial securities. The eect of the governance problem on the cost of capital is subtle: a positive continuation utility at termination implies some recovery by nanciers and so decreases the credit spread. But a deterioration in governance increases that spread sharply.

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