Costly monitoring, dynamic incentives, and default

Gaetano Antinolfi*, Francesco Carli

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We study dynamic contracts between a lender and a borrower in the presence of costly state verification and hidden effort. We prove three results. Costly monitoring is employed by the lender to optimally limit history dependence and prevent future inefficient termination of the relationship. Due to interaction between costly monitoring and dynamic incentives, the probability of monitoring may fail to be monotone in the borrower's reservation utility. Finally, following the interpretation of the costly state verification literature, we distinguish two levels of bankruptcy: one associated with restructuring and the other with liquidation.
Original languageEnglish
Pages (from-to)105-119
Number of pages15
JournalJournal of Economic Theory
Issue numberPA
Publication statusPublished - 1 Sept 2015


  • Costly state verification
  • Default
  • Dynamic contracts
  • Monitoring
  • Moral hazard


Dive into the research topics of 'Costly monitoring, dynamic incentives, and default'. Together they form a unique fingerprint.

Cite this