Journal article
Monitoring the monitor: An incentive structure for a financial intermediary
Journal of economic theory, Vol.57(1), pp.197-221
1992
DOI: 10.1016/S0022-0531(05)80048-1
Abstract
This paper studies financial intermediation (i.e., delegated monitoring) in a costly state verification model. There are a finite number of agents, thus the intermediary cannot fully diversify its portfolio and is subject to default risk. The role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders. Two questions arise when a delegated monitor is subject to non-trivial default risk: (a) What arrangement solves the problem of monitoring the monitor? (b) What intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders? Unlike previous delegated monitoring studies, the
law of large numbers is not sufficient to obtain our results. Instead, we appeal to a stronger results, the
large deviation principle, which establishes that convergence in the law of large numbers is exponential.
Details
- Title: Subtitle
- Monitoring the monitor: An incentive structure for a financial intermediary
- Creators
- Stefan KrasaAnne P Villamil
- Resource Type
- Journal article
- Publication Details
- Journal of economic theory, Vol.57(1), pp.197-221
- Publisher
- Elsevier Inc
- DOI
- 10.1016/S0022-0531(05)80048-1
- ISSN
- 0022-0531
- eISSN
- 1095-7235
- Language
- English
- Date published
- 1992
- Academic Unit
- Economics
- Record Identifier
- 9984083201302771
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