Are Two Investors Better Than One?

This paper compares,the optimal investor repayment,contracts of a …rm which has private information,over its expost revenues,when,the …nance can be pro- vided by a single or by two groups investors. Costly monitoring,can be carried out only by one group of investors. When,they are the only investors we use the Khalil-Parigi …nancial contract with non-contractible monitoring, in which the probabilities of cheating by the entrepreneur/…rm,and monitoring,by investors are mutual,best responses. The contract is written by the entrepreneur,knowing that this equilibrium,will subsequently,occur. With a second group of investors who have no monitoring rights, cheating and monitoring probabilities are chosen in a similar way. The non monitoring,investors learn the results of any moni- toring for free. A main,result is that without,commitment,there is a negative correlation between,repayments,to the two investor groups: the contract uses the non-monitoring,group,to smooth,out the repayments,of the entrepreneur optimally. This reduces his incentive to make,false reports and mitigates the investor’s incentive to monitor. A second result is that the two investor scenario is Pareto superior to the single investor model. A third result is that the possible extent of this smoothing,depends,on whether,the investors have limited liability; it is found that in some,circumstances,investors should make,repayments,to the …rm rather than receive them. A further result is that, by restricting to of- fers coming from the informed party, the three party contract is collusion-proof and renegotiation-proof. Last we show,that under limited liability the share of …nance provided by the two investors is strictly positive. Keywords: …nancial contracts, multiple investors, no commitment JEL Nos: D82, D83