Financing Multi-stage projects under moral hazard and limited commitment

Josepa Miquel-Florensa ()

Working Papers from York University, Department of Economics

Abstract: We present the optimal contract for financing a project that has N stages to be completed sequentially when the principal can not commit to abandone the project before it is completed and the project to be completed is valued by the agent. In a dynamic moral hazard setting, we find that the optimal contract provides decreasing transfers for successive unsuccessful attempts in a given stage, and smaller transfers when the subsequent stages are reached. We find that the optimal sequence of transfers is greater the bigger is the exogenous probability of returning to a preceding stage and the greater the principal’s cost of stage verification is. When intermediate stages are valued by the agent, we find that smaller transfers are optimal.

Keywords: Dynamic contracts; Moral Hazard; Foreign Aid; multi-stage projects (search for similar items in EconPapers)
JEL-codes: D82 D86 F35 O12 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-05
New Economics Papers: this item is included in nep-bec, nep-dev, nep-mic and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dept.econ.yorku.ca/research/workingPapers/w ... StagesFeb14_2007.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yca:wpaper:2007_4

Access Statistics for this paper

More papers in Working Papers from York University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Support ( this e-mail address is bad, please contact ).