Misperceptions,moral hazard and incentives in groups

Recent work has shown that, in the presence of moral hazard, balanced-budget Nash equilibria in groups are not Pareto-optimal. This work shows that when agents misperceive the effects of their actions on the joint outcome there exist a set of sharing rules which balance the budget and lead to a Pareto-optimal Nash equilibrium.     

Deposit insurance subsidies,moral hazard,and bank regulation

The model developed in the paper separates deposit insurance subsidies into two components: a premium-linked subsidy which arises from an ex-ante mispricing of the deposit insurance premium, and an asset-linked subsidy which arises from a lack of ex-post monitoring of the bank's actions. The identification of these two subsidies provides important insight into the relation between deposit-insurance subsidies and bank risk. The asset-linked subsidy is higher for banks of average risk and lower for very-high and very-low risk banks. The premiumlinked subsidy behaves differently under risk-adjusted and fixed-rate premiums. The model also indicates that the implementation of a riskadjusted insurance-rate schedule alone would not be sufficient to eliminate the bank's excessive risk-taking behavior. Thus, some combination of risk-sensitive deposit-insurance pricing and regulatory control is necessary to reduce the moral hazard problem.     

Repeated moral hazard and recursive Lagrangeans

This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques à la Marcet and Marimon (2011) to problems with hidden actions. The method has many advantages with respect to the promised utilities approach (Abreu et al., 1990): it is a significant improvement in terms of simplicity, tractability and computational speed. Solutions can be easily computed for hidden actions models with several endogenous state variables and several agents, while the promised utilities approach becomes extremely difficult and computationally intensive even with just one state variable or two agents.     

On moral hazard and nonexclusive contracts

We study an economy where intermediaries compete over contracts in a nonexclusive insurance market affected by moral hazard. In this context, we show that, contrarily to what is commonly believed, market equilibria may fail to be efficient even if the planner is not allowed to enforce exclusivity of trades (third best inefficiency). Our setting is the same as that of Bisin and Guaitoli [Bisin, A., Guaitoli, D., 2004. Moral hazard with nonexclusive contracts. Rand Journal of Economics 2, 306–328]. We hence argue that some of the equilibrium conditions they imposed are not necessary, and we exhibit a set of equilibrium allocations which fail to satisfy them.     

Securitization and optimal retention under moral hazard

Securitization improves liquidity in capital markets by allowing originators to remove issued loans from its balance sheet and use the proceeds for other purposes. Securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay their loans. One problem in the literature is that the analysis of securitization is very general and suffers from a lack of specific security design analysis under asymmetric information. We address the moral hazard problem using a principal–agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard. The optimal retention is affected by tranching and credit enhancement.     

Locally robust contracts for moral hazard

We consider a moral hazard problem in which the principal has a slight uncertainty about how the agent’s actions translate into output. An incentive contract can be made robust against an $ϵ$ amount of uncertainty, at the cost of a loss to the principal on the order of $\sqrt{ϵ}$, by refunding a small fraction of profit to the agent. We show that as $ϵ$ goes to zero, this construction is essentially optimal, in the sense of minimizing the worst-case loss, among all modifications to the contract that do not depend on the details of the environment.     

Executive compensation and earnings management under moral hazard

This paper analyzes executive compensation in a setting where managers may take a costly action to manipulate corporate performance, and whether managers do so is stochastic. We show that an increase in the possibility of manipulation actually calls for executive pay to be more responsive to reported performance. In addition, regulatory reforms that increase the cost involved in manipulation may lead to reduced pay-for-performance sensitivities. The time-series and cross-sectional variations of executive compensation lend support to our model.     

Contracting under ex post moral hazard and non-commitment

This paper characterizes the optimal insurance contract in an environment where an informed agent can misrepresent the state of the world to a principal who cannot credibly commit to an auditing strategy. Because the principal cannot commit, the optimal strategy of the agent is not to tell the truth all the time. Assuming that there are T > 1 possible losses, and that the agent cannot fake an accident (he is constrained only to misreport the size of the loss when a loss occurs), the optimal contract is such that higher losses are over-compensated while lower losses are on average under-compensated. The amount by which higher losses are over-compensated decreases as the loss increases. The optimal contract may then be represented as a simple combination of a deductible, a lump-sum payment and a coinsurance provision.Received: 29 January 1999, Accepted: 26 June 2001, JEL Classification: D82, G2, C72.I would like to thank my dissertation committee Stanley Baiman, David Cummins, Georges Dionne, Neil Doherty and Sharon Tennyson (supervisor) for their insights, as well as Keith Crocker, Steve Coate, Richard Derrig, Michele Piccone and Pascale Viala. The financial help received during my doctoral studies from the Social Sciences and Humanities Research Council of Canada (SSHRC) and the S. S. Huebner Foundation are gratefully acknowledged. This research has been funded by the Fonds pour la Formation de Chercheurs et d'Aide à la Recherche (FCAR-Québec), SSHRC-Canada and the Risk Management Chair at HEC Montréal. The continuing financial support of CIRANO is also appreciated. I am responsible for all errors.     

Optimal securities under adverse selection and moral hazard

We consider project financing under adverse selection and moral hazard and derive several interesting results. First, we provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Second, we show that, in the presence of moral hazard, adverse selection may induce the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, we provide a rationale for the use of warrants. We also show that a debt–warrant combination can implement the optimal contract. Our results have a number of testable implications.     

Capital market equilibrium with moral hazard and flexible technology

(Magill, M., Quinzii, M., 2002. Capital market equilibrium with moral hazard. Journal of Mathematical Economics 38, 149–190) showed that, in a stockmarket economy with private information, the moral hazard problem may be resolved provided that a spanning overlap condition is satisfed. This result depends on the assumption that the technology is given by a stochastic production function with a single scalar input. The object of the present paper is to extend the analysis of Magill and Quinzii to the case of multiple inputs. We show that their main result extends to this general case if and only if, for each firm, the number of linearly independent combinations of securities having payoffs correlated with, but not dependent on, the firms output is equal to the number of degrees of freedom in the firm’s production technology.     

Existence and monotonicity of solutions to moral hazard problems

This paper provides a method to prove existence of solutions to some moral hazard problems with infinite set of outcomes. The argument is based on the concept of nondecreasing rearrangement and on a supermodular version of Hardy–Littlewood’s inequality. The method also provides qualitative properties of solutions. Both the cases of wage contracts and of insurance contracts are studied.     

Migrant wages,remittances and recipient labour supply in a moral hazard model

This paper analyzes the interaction between migrants’ income and remittances and between remittances and the labour supply of residents. The model is cast as a two-period game with imperfect information about the residents’ real economic situation. Residents subject to a good economic situation may behave as if they were in a poor economic situation only in order to manipulate remitters’ expectations. The latter, being aware of this risk, reduce the remitted amount accordingly. Therefore, in the equilibrium, residents who really are victims of the bad economic outlook are penalized as compared to the perfect information set-up. In some circumstances, they can signal their type by drastically cutting working hours, thus further enhancing their precarity right when their economic situation is the worst.     

Optimal insurance under moral hazard in loss reduction

This study investigates the optimal insurance when moral hazard exists in loss reduction. We identify that the optimal insurance is full insurance up to a limit and partial insurance above that limit. In case of partial insurance, the indemnity schedule for prudent individual is convex, linear, or concave in loss, depending on the shapes of the utility and loss distribution. The optimal insurance may include a deductible for large losses only when the indemnity schedule is convex. It may also include a fixed reimbursement when the schedule is convex or concave. When the loss distribution belongs to the one dimensional exponential family with canonical form, the indemnity schedule is concave under IARA and CARA, whereas it can be concave or convex under DARA.     

Sectoral bubbles,misallocation, and endogenous growth

Stock price bubbles are often on productive assets and occur in a sector of the economy. In addition, their occurrence is often accompanied by credit booms. Incorporating these features, we provide a two-sector endogenous growth model with credit-driven stock price bubbles. Bubbles have a credit easing effect in that they relax collateral constraints and improve investment efficiency. Sectoral bubbles also have a capital reallocation effect in the sense that bubbles in a sector attract more capital to be reallocated to that sector. Their impact on economic growth depends on the interplay between these two effects. Bubbles may misallocate resources across sectors and reduce welfare.     

Population,pensions, and endogenous economic growth

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy and obtain the following results. First, the effect of a decline in population growth on labor productivity growth is positive and quantitatively significant. In our benchmark, it is predicted to increase from an average annual growth rate of 1.74% over 1990–2000 to 2.41% in 2100. Second, institutional characteristics of the pension system matter both for the growth performance and for individual welfare. Third, the assessment of pension reform proposals may depend on whether economic growth is endogenous or exogenous.     

Competing mechanism games of moral hazard: communication and robustness

We consider multiple-principal multiple-agent models of moral hazard: principals compete through mechanisms in the presence of agents who take unobservable actions. In this context, we provide a rationale for restricting principals to make use of simple mechanisms, which correspond to direct mechanisms in the standard framework of Myerson (J Math Econ 10:67–81, 1982). Our results complement those of Han (J Econ Theory 137(1):610–626, 2007) who analyzes a complete information setting where agents’ actions are fully contractible.     

Insolvency,moral hazard and expense preference behavior: Evidence from US savings and loan associations

This article applies the expense preference methodology to a study of determinants of employee compensation and occupancy costs for large samples of mutual and stock savings and loan associations. Strong evidence that insolvency is associated with significant increases in these costs is obtained. Further, we find that the effect of insolvency on managerial expense preference behavior is more pronounced for mutual than stock associations.     

Equilibrium unemployment and wage formation with matching frictions and worker moral hazard

This paper combines the shirking and the matching approaches of equilibrium unemployment in order to endogenize the wage formation process as a function of labour market conditions. The steady-state equilibrium can take two forms depending on whether the no-shirking condition is binding or not. It is demonstrated that the efficiency wage approach is relevant when the unemployment rate is above a certain threshold. Furthermore, an efficiency wage is more likely when the disutility of effort is high, recruiting costs and workers' bargaining power are low, inspections are unlikely and the workers' productivity is weak.     

International endogenous growth,macro anomalies,and asset prices

This paper develops a two-country production economy with complete and frictionless financial markets and international trade in which investments in research and development (R&D) by entrants lead to endogenous new firm creation and economic growth. Innovative entrants use both consumption goods in their innovation technologies to capture international technological spillovers. Households also consume both goods. Specifically, I compare the equilibrium implications from the model with technology spillovers to the ones from an equivalent model without technology spillovers, i.e. a model where entrants only use domestic final goods in their R&D expenditures. With these two models at hand, new insights on the interplay of endogenous growth and long-run risks, technology spillovers, complete financial markets, and international trade are obtained, particularly with respect to international macro and asset pricing anomalies. The novel technology spillover channel has the potential to help explaining a number of these anomalies.