This paper studies the incentive issues associated with self-enforcing stochastic monitoring in a model of investment and production. The efficient contract features a debt-like payment with a threshold in terms of the reported output in which all of the reported output is taken up to the...

This paper studies self-enforcing stochastic monitoring in a model of investment and production. The optimal contract leads to debt-like and equity-like claims on the firm which are held by symmetrically informed outside investors, and rationalizes the separation of these claims in order to...