Abstract
In a dynamic agency model, investors finance a firm run by an agent while delegating monitoring and contracting with the agent to an intermediary. The intermediary passes through part of its incentives to the agent. After good performance, the agent's incentives create an agency overhang problem, that is, the reduced incentives of the intermediary for monitoring because its benefit accrues mostly to the agent. Conversely, after poor performance, the agent's incentives generate incentives for monitoring to avoid further distress. Investors can benefit from directly contracting with the agent to prevent propagating agency conflicts between the agent and the intermediary.
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