A Two‐sided Matching Model of Monitored Finance

Bibliographic Data

ID9723841
AuthorsArturo Antón (0000-0002-9584-5203, Centro de Investigación y Docencia Económicas), Kaniṣka Dam (0000-0001-7418-623X, Centro de Investigación y Docencia Económicas and El Colegio de México)
Year2020
Volume87
Issue345
Pages132-157
Publication date2020-01-01
Open AccessYes
TypeARTICLE
VenueEconomica (JOURNAL)
Journal identifiersISSN: 0013-0427 • E-ISSN: 1468-0335
PublisherWiley (PUBLISHER • GB)
DOI10.1111/ecca.12298
OpenAlexW2132748370
LanguageEN
References cited41

We analyse an incentive contracting model of partnership formation between heterogeneous investors and entrepreneurs. Partnerships are subject to double‐sided moral hazard problems in entrepreneurial action and monitoring by investors. Greater monitoring ability implies stronger incentives to monitor. On the other hand, low‐collateral borrowers have lower inside equity participation. Hence the incentive problem is best mitigated by assigning low‐collateralized entrepreneurs to high‐ability investors following a negative assortative matching pattern. Moreover, negative assortative matching implies that the equilibrium loan rate is in general non‐monotonic in borrower collateral. Finally, our model sheds light on how changes in the inequality of collateral distribution affect the cost of external borrowing

Collateral · Collateralized debt obligation · Economics · Equity (law) · General partnership · Incentive · Loan · Matching (statistics) · Microeconomics · Monetary economics · Moral hazard · Banking stability, regulation, efficiency · Corporate Finance and Governance · Finance · Private Equity and Venture Capital

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