IDEAS home Printed from https://ideas.repec.org/a/spr/reecde/v3y1998i3p237-255.html
   My bibliography  Save this article

A mechanism design approach to an optimal contract under ex ante and ex post private information

Author

Listed:
  • C. Choe

    (Department of Economics, School of Business, La Trobe University, Melbourne, Victoria 3083, Australia)

Abstract

This paper applies a mechanism design approach to the problem of an optimal contract when one party has both ex ante and ex post private information. With ex ante private information added to the costly state verification environment, the timing of the contract is important in achieving the first-best investment decision. It is shown that an optimal contract involves precommitment, a feature often observed in many bank loan contracts. An optimal contract thus obtained is interpreted as t he golden parachute, a device providing incentives to managers not to distort the running of a firm to fight takeover bids. In the process of characterizing an optimal contract, the revelation principle is re-examined.

Suggested Citation

  • C. Choe, 1998. "A mechanism design approach to an optimal contract under ex ante and ex post private information," Review of Economic Design, Springer;Society for Economic Design, vol. 3(3), pages 237-255.
    • Handle: RePEc:spr:reecde:v:3:y:1998:i:3:p:237-255
    Note: Received: 12 April 1996 / Accepted: 3 December 1997
    as

    Download full text from publisher

    File URL: http://link.springer.de/link/service/journals/10058/papers/8003003/80030237.pdf
    Download Restriction: Access to the full text of the articles in this series is restricted
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fabienne Llense, 2009. "Taxes on severance pay, corporate governance and golden handshakes," Post-Print halshs-00441911, HAL.
    2. Attar, Andrea & Campioni, Eloisa, 2003. "Costly state verification and debt contracts: a critical resume," Research in Economics, Elsevier, vol. 57(4), pages 315-343, December.
    3. Chongwoo Choe, 2006. "Optimal CEO Compensation: Some Equivalence Results," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 171-201, January.
    4. Enrico Minelli & Salvatore Modica, 2009. "Credit Market Failures and Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 363-382, June.
    5. Praveen Kumar & Nisan Langberg, 2009. "Corporate fraud and investment distortions in efficient capital markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 144-172, March.
    6. ATTAR, Andréa, 2003. "Financial contracting along the business cycle," LIDAM Discussion Papers CORE 2003069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Iossa, Elisabetta, 2001. "Third Party Monitoring and Golden Parachutes," CEPR Discussion Papers 2777, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reecde:v:3:y:1998:i:3:p:237-255. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.