Search results for "Moral hazard"
showing 10 items of 12 documents
The Separating Role of Collateral Requirements in Credit Markets with Asymmetric Information
2001
In this paper we test Bester's (1985, 1987) prediction about the separating role of contracts that involve both interest rates and collateral requirements in credit markets. To test this prediction we use data from natural credit markets and controlled experiments. Using a sample of credits to small and medium size firms in Valencia, Spain, we relate two different types of contracts with the ex post risk type of the borrower and other relevant variables. We then design two incentive compatible contracts and analyze decisions under two different experimental treatments, one with moral hazard. Our empirical results confirm that borrowers of ex post lower risk choose contracts with higher coll…
Prevention of occupational injuries: moral hazard and complex agency relationships
2004
This paper exploits the results of agency theory with the aim of contributing a new viewpoint and a form for analysis of the current functioning of the occupational injury and disease section of the French Social Security system in its mission of providing incentives for prevention. After outlining the organization and specific features of insurance against occupational risks, an initial level of analysis highlights the presence of moral hazard in relations between insurer and company and between company and employee. A second level of analysis with the appeal to complex agency relationship models, multitask model and third-party model, is necessary to take into account the consequences for…
A New Aid Modality for Africa: Old Age Cash Transfers
2010
This paper examines the issue of foreign aid and cash transfers to individuals in low-income economies typically found in Africa. Old-age conditional cash transfers and new mobile banking technology can cope with the well-documented problems related to moral hazard and high transaction costs with such policy interactions. Cash transfers can stimulate old and retired individuals’ demand for the consumption goods and services, and thereby affect product prices and wages. Developing economies being characterised by underemployment and gross substitution between consumption and leisure, these transfers can stimulate the labour supply and increase capacity utilisation and the production of labou…
Investor Protection and Business Creation
2003
We study the effects of investor protection on the availability of external finance, entrepreneurship, and creation of new firms in an equilibrium search model of private capital markets. In addition to search frictions, we examine contract frictions, specifically interim and ex post moral hazard problems stemming from entrepreneurs' possibilities to expropriate financiers. In our model, the government chooses the level of investor protection that determines the transferability of match surplus between entrepreneurs and financiers. The results indicate that anything that increases (decreases) entrepreneurship also increases (decreases) the creation of start-ups. The effect of investor prote…
Optimal lending contracts
2016
This paper deals with financial contracting between a lender and a borrower with a project to finance. The borrower is protected by limited liability. We consider that the revenue from the project is observable and verifiable but its distribution is influenced by both the borrower’s choice of action and the project’s quality, which are private information. We find that debt contracts are endogenously optimal, as under moral hazard alone. Moreover, while moral hazard leads to credit rationing for the lowest-quality projects only, adding adverse selection creates a bang-bang result: either all projects or none are credit rationed.
Entrepreneurship and Credit Rationing: How to Screen Successful Projects in this Current Crisis Period
2013
The current credit rationing heavily influences entrepreneurship and, more dramatically, the viability of innovation projects. In this context, mechanisms to screen successful projects are of paramount importance for both lenders and entrepreneurs. We present an experiment to test the collateral-interest mechanism of credit screening. Our results confirm that incentive-compatible pairs of collateral-interest rate can distinguish between projects of different success probability, even in moral hazard settings.
Capital Regulation with Heterogeneous Banks
2013
We provide a general equilibrium analysis of potential consequences from the introduction of a binding leverage ratio, as proposed in Basel III. If banks differ in their monitoring skills and their ability to successfully complete a risky investment project, a tighter leverage ratio does not only mitigate moral hazard arising from limited liability, but also carries an unintended consequence: Banks are not allowed to absorb the entire supply of debt if they cannot raise new equity, which induces agents with a lower monitoring skill to open a bank. This decreases the average ability of operating banks. We further show that rising heterogeneity in the banking sector increases this negative ef…
Incentive Schemes, Private Information and the Double-Edged Role of Competition for Agents
2013
This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents, who have private information on their productivity. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. The superior firm employs both agent types in equilibrium, but the competitive pressure exerted by the inferior firm has a strong impact on contract design: For high degrees of vertical differentiation, i.e. low competition, low-ability agents are under-incentivized and exert too little effort. For high degrees of competition, high-ability agents are over-incentivized…
Are you a good employee or simply a good guy? Influence costs and contract design
2013
We develop a principal–agent model with a moral hazard problem in which the principal has access to a hard signal (the level of output) and a soft behavioral signal (the supervision signal) about the agent's level of effort. In our model, the agent can initiate influence activities and manipulate the behavioral signal. These activities are costly for the principal as they detract the agent from the productive task. We show that the agent's ability to manipulate the behavioral signal leads to low-powered incentives and increases the cost of implementing the efficient equilibrium as a result. Interestingly, the fact that manipulation activities entail productivity losses may lead to the desig…
The Multi-Faceted Concept of Transparency
2014
Transparency has become a catchword and in the economic-political debate is often seen as a universal remedy for all sorts of problems. In this paper, we analyze and discuss the meaning and use of the concept of transparency in economic research. We look for common denominators across different areas where the concept is used, and find that transparency in essence is about reductions in information asymmetries, and therefore entails the transfer of information from a sender to a receiver. Transparency goes beyond mere information disclosure in that it has a demand-side dimension: the information transferred should be trustworthy and have a value to the receiver. We emphasize the distinction…