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...

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...