Monitoring is one means by which creditors can control a borrower's incentive to expropriate wealth from the creditors.However, direct monitoring of a borrower's actions is more difficult in a public bond issue than in a private bond issue because of the:

Question

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The free-rider problem makes direct monitoring more difficult in public bond issues because individual investors rely on others to monitor the borrower, leading to underinvestment in monitoring efforts.

Monitoring Is One Means by Which Creditors Can Control a Borrower's