A model of contract guarantees for credit-sensitive, opaque financial intermediaries

The effective delivery of many financial services depends critically on the credit-worthiness of the provider financial institution. The shared credit standing of the institution's individual businesses can therefore cause a significant failure of the principle of "value-additivity" which complicates decentralization of the capital budgeting and financial decisions. This paper addresses this complexity with a model of incentive contracts as a substitute for direct monitoring of the institution.