We talk about a problem in Corporate Governance in active monitoring. The monitoring level here is a variable and not a
Posted: Thu Apr 28, 2022 12:40 pm
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 expected return for the monitor.
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 expected return for the monitor.