We talk about a problem in Corporate Governance in active monitoring. A monitor learns about the Bad Project, which yields private benefit B, with probability M. The monitor learns nothing with probability 1-M. This probability of M of effective monitoring (=monitoring level) is dependent on the effort cost or what we call disutility of effort g(M) incurred by this monitor. It is assumed that disutility of effort is increasing g’()>0 and convex g’’()>0. We also assume that g’(0) and g’(1) = ∞. Let Rb be the borrower’s reward. In successful case, its value is b/Δp < Rb < B/Δp. Let Rm be the monitor’s payoff in a successful case. The question is: Show the Net Present Value of the project for monitoring level M.
We talk about a problem in Corporate Governance in active monitoring. A monitor learns about the Bad Project, which yields private benefit B, with probability M. The monitor learns nothing with probability 1-M. This probability of M of effective monitoring (=monitoring level) is dependent on the effort cost or what we call disutility of effort g(M) incurred by this monitor. It is assumed that disutility of effort is increasing g’()>0 and convex g’’()>0. We also assume that g’(0) and g’(1) = ∞. Let Rb be the borrower’s reward. In successful case, its value is b/Δp < Rb < B/Δp. Let Rm be the monitor’s payoff in a successful case. The question is: Show the Net Present Value of the project for monitoring level M.
Chapter12: Balanced Scorecard And Other Performance Measures
Section: Chapter Questions
Problem 8MC: What should an organization do if performance measures change? A. Make sure that the manager being...
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We talk about a problem in Corporate Governance in active monitoring.
A monitor learns about the Bad Project, which yields private benefit B, with probability M. The monitor learns nothing with probability 1-M. This probability of M of effective monitoring (=monitoring level) is dependent on the effort cost or what we call disutility of effort g(M) incurred by this monitor. It is assumed that disutility of effort is increasing g’()>0 and convex g’’()>0. We also assume that g’(0) and g’(1) = ∞. Let Rb be the borrower’s reward. In successful case, its value is b/Δp < Rb < B/Δp. Let Rm be the monitor’s payoff in a successful case.
The question is: Show the Net Present Value of the project for monitoring level M.
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