Answer Happy

We talk about a problem in Corporate Governance in active
monitoring.
The monitoring level here is a variable and not a fixed
value. A monitor learns about the Bad Project, which yields
private benefit B, with probability M. The monitor learns nothing
with probability 1-M. This probability of M of effective monitoring
(=monitoring level) is dependent on the effort cost or what we call
disutility of effort g(M) incurred by this monitor. It is assumed
that disutility of effort is increasing g’()>0 and convex
g’’()>0. We also assume that g’(0) and g’(1) = ∞. Let Rb be the
borrower’s reward. In successful case, its value is b/Δp < Rb
< B/Δp. Let Rm be the monitor’s payoff in a successful case.
The question is: Show the Net Present Value of the project for
monitoring level M.