Abstract:

We study a continuous-time agency model in which a principal invests in a firm run by a manager and monitored by an intermediary. Both the manager and the intermediary are subject to moral hazard. We analyze two different contracting settings depending on the type of intermediation. In delegated monitoring, the principal can provide the optimal level of incentives to both the intermediary and the manager. In delegated contracting, the principal offers a contract only to the intermediary, who in turn designs a contract for the manager. Optimal incentives are qualitatively different the two cases. Whereas strong performance shifts incentives from the manager to the intermediary under delegated monitoring, it increases incentives for both agents under delegated contracting. Agency conflicts at the intermediary level lead to overprovision of managerial incentives under delegated monitoring and underprovision of managerial incentives under delegated contracting.

Joint work with Simon Mayer