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Financing Multi-stage projects under moral hazard and limited commitment

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  • Josepa Miquel-Florensa

    (Department of Economics, York University)

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.

Suggested Citation

  • Josepa Miquel-Florensa, 2007. "Financing Multi-stage projects under moral hazard and limited commitment," Working Papers 2007_4, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2007_4
    as

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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2007/StagesFeb14_2007.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dynamic contracts; Moral Hazard; Foreign Aid; multi-stage projects;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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