TY  - JOUR
AU  - Rey,Patrick
AU  - Stiglitz,Joseph E.
TI  - Short-Term Contracts as a Monitoring Device
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4514
PY  - 1993
Y2  - October 1993
UR  - http://www.nber.org/papers/w4514
L1  - http://www.nber.org/papers/w4514.pdf
N1  - Author contact info:
Joseph E. Stiglitz
Uris Hall, Columbia University
3022 Broadway, Room 814
New York, NY  10027
Tel: 212/854-0671
Fax: 212/662-8474
E-Mail: jes322@columbia.edu
AB  - This paper focuses on two separate problems. The first is that frequently, the most profitable use of funds involves long-term investments, which militiates for long-term debt contracts. The second problem is to monitor the investor's use of funds, as exemplified by the U.S. S&L saga, and we argue that short-term debt provides investors, who can withdraw their funds, with a real threat over firms. We show that short-term investors have both desirable incentives to exert control and invest in monitoring, and that this monitoring concern provides an explanation of the often lamented disparity between the maturity of banks' assets and liabilities. We also explore in detail the trade-off between long-term and short-term debt, including the possibility of multiple contracts and of priority rules.
ER  -