Monitoring a common agent: Implications for financial contracting

Multiple principals want to obtain income from a privately informed agent and design their contracts non-cooperatively. The degree of coordination between principals shapes the contracts and affects the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals coordinate or verify each others’ monitoring efforts. When this is not possible, free riding weakens monitoring incentives, so that ßat payments, debt-like contracts and very low levels of monitoring appear. Free riding may be so strong to induce even less monitoring than if the principals cooperated with each other; that is non-cooperative monitoring does not necessarily lead to excessive monitoring.