Optimal securitization with moral hazard

We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect. Finally, we demonstrate that the optimal contract can be closely approximated by the “first loss piece.”     

风险导向型审计与道德风险

"银广夏"事件的爆发,使我国审计界再次感受到前所未有的审计风险.如何回避审计风险、保护自身的发展,成为会计职业界关注与讨论的一个重要话题.有一种观点认为,引入风险导向型审计,是职业界的最佳选择.本文主要关注风险导向型审计如何合理地应用于我国当前的经济环境,以提高审计质量.     

Investment and liquidation in renegotiation-proof contracts with moral hazard

In a long-term contract with moral hazard, the liquidation of the firm can arise as the outcome of the optimal contract. However, if the future production capability or market opportunities remain unchanged, liquidation may not be free from renegotiation. Will the firm ever be liquidated if we allow for renegotiation? This paper shows that the firm can still be liquidated even though liquidation is not free from renegotiation in the long-term contract. In addition to liquidation, the renegotiation-proof contract generates important features of the investment behavior and dynamics of firms observed in the data.     

Credit market equilibrium with bank monitoring and moral hazard

We characterize a credit market equilibrium in which banks coexistwith capital markets and firms obtain funding from both sources.An incentive problem exists between the firm's insiders andoutside providers of capital. Banks can provide not only creditbut also monitoring services. We show that when banks cannotprecommit to a particular level of monitoring there is a uniquecredit market equilibrium with firms being financed with a combinationof bank credit and external capital. In this equilibrium, amarginal substitution of bank credit for capital market financingwould raise the firm's stock price.     

Capital flows under moral hazard

I analyze a model with moral hazard and limited enforcement in a small open economy. I find that when state contingent contracting is allowed adding the moral hazard friction improves the model's predictions along several dimensions. First, it justifies why non-contingent debt is an optimal way to finance an emerging economy. Second, it explains the limited consumption risk-sharing and high, volatile and counter-cyclical interest rates. Third, it generates realistic crisis-like dynamics in which capital inflows are brought to a halt and interest rates sky-rocket. The model also has a strong internal propagation mechanism.     

The price of moral hazard

Abstract

1. In this note we shall show that a simple application of game theory makes it possible to determine the costs associated with the presence of moral hazard.     

Warranties as signals under consumer moral hazard.

This article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases. The seller's incentives are strongly affected by the interaction of quality and maintenance in determining product reliability. Two different assumptions about this interaction are made. A separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases.     

Fixed-percentage commissions and moral hazard in residential real estate brokerage

If home sellers cannot monitor real estate brokers' efforts on their behalf, fixed-percentage brokerage commissions can promote welfare by giving brokers an incentive to tailor their services to their clients' demands. This article shows how a competitive broker optimally allocates selling effort across clients who pay different commissions. There is an equilibrium in which clients who value brokerage services more highly offer to pay larger commissions and consequently receive more selling effort from the broker. If clients who are selling higher-priced houses tend to value brokerage services more highly, then this result helps explain the prevalence of fixed-percentage commissions in the residential real estate brokerage industry and suggests that they could emerge in a competitive setting.     

Adverse selection and moral hazard: Quantitative implications for unemployment insurance

A model of optimal unemployment insurance with adverse selection and moral hazard is constructed. The model generates both qualitative and quantitative implications for the optimal provision of unemployment insurance. Qualitatively, for some agents, incentives in the optimal contract imply consumption increases over the duration of non-employment. Calibrating the model to a stylized version of the U.S. economy quantitatively illustrates these theoretical predictions. The optimal contract achieves a welfare gain of 1.94% relative to the current U.S. system, an additional 0.87% of gains relative to a planner who ignores adverse selection and focuses only on moral hazard.     

Liquidity protection versus moral hazard: the role of the IMF

A game between the IMF, a country and atomistic private investors is motivated by recent crises including that in Argentina. The one stage game has no Nash equilibrium in pure strategies. Considering an equilibrium in mixed strategies, conditions are derived on whether the IMF should exist. A “cooperative first best” may be supported in a repeated game by a “minimum punishment strategy” but breaks down as the probability of insolvency rises. Countries are likely to deviate in bad times placing the IMF in an “impossible position”. The international financial architecture (IFA) remains incomplete.     

A theory of mutual formation and moral hazard with evidence from the history of the insurance industry

Nonprofit, mutually owned insurance and banking organizationshave significant market shares in the insurance and bankingindustries. A first step in a systematic study of these financialmutuals is to examined the reasons for their formation. Doingso provides empirical support for the view that these mutualsarose as an efficient means of addressing contracting challengescaused by aggregate uncertainties and moral hazard. A formalmodel with this property is presented. We argue that informationasymmetries do more to explain the kinds of contracts offeredby financial mutuals than do agency problems between owners,managers, and customers.     

Structural estimation of a principal-agent model: moral hazard in medical insurance

Despite the importance of principal-agent models in the development of modern economic theory, there are few estimations of these models. I recover the estimates of a principal-agent model and obtain an approximation to the optimal contract. The results show that out-of-pocket payments follow a concave profile with respect to costs of treatment. I estimate the welfare loss due to moral hazard, taking into account income effects. I also propose a new measure of moral hazard based on the conditional correlation between contractible and noncontractible variables.     

基于多层级委托代理的金融机构内部道德风险模型

道德风险问题是我国金融业普遍存在的问题,许多金融案件的发生无不与金融从业人员的职业道德水平有关。而目前金融系统实行的多层级委托代理经营管理模式存在制度缺陷和道德风险隐患。本文通过建立三方两阶段的博弈模型,对我国金融业中多层级委托-代理存在的道德风险给出实证分析,提出具有实践意义的建议。     

On the design of optimal health insurance contracts under ex post moral hazard

We analyze the design of optimal medical insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide for themselves on their health expenditures. The trade-off between ex ante risk sharing and ex post incentive compatibility is analyzed in an optimal revelation mechanism under hidden information and risk aversion. The optimal contract provides partial insurance at the margin, with a deductible when insurers’ rates are affected by a positive loading, and it may also include an upper limit on coverage. The potential to audit the health state leads to an upper limit on out-of-pocket expenses.     

International lending of last resort and moral hazard: A model of IMF's catalytic finance

This paper analyzes the trade-off between official liquidity provision and debtor moral hazard in international financial crises. In the model, crises are caused by the interaction of bad fundamentals, self-fulfilling runs and policies by three classes of optimizing agents: international investors, the local government and an international official lender. Limited contingent liquidity support helps to prevent liquidity runs by raising the number of investors willing to lend to the country for any given fundamentals, i.e., it can have catalytic effects. The influence of the official lender is increasing in the size of its interventions and the precision of its information. Unlike the conventional view stressing debtor moral hazard, our model identifies circumstances in which official lending actually strengthens a government's incentive to implement desirable but costly policies.     

Efficient contracting and accounting

This paper examines the role of accounting in an efficient contracting perspective of the firm. The firm is an alternative to the market when the costs of using the market become excessive. When a firm replaces the market, authority substitutes for the price mechanism in determining how decisions are made. This paper examines accounting's role in controlling the firm to ensure resources are put to their highest-value use. Accounting, together with employment contracts, compensation arrangements, debt contracts, internal and external auditors, and the board of directors including its audit and compensation committees comprise a package of mechanisms that have evolved to govern the firm. These institutional devices become the firm's efficient contracting technology. As accounting is part of that contracting technology, the accounting controls and systems that evolve and get implemented are efficient and the accounting methods that are used in calculating the numbers that form part of the firm's contractual arrangements are, likewise, efficient.     

Staged venture capital contracting with ratchets and liquidation rights

This paper uses real options analysis to study later round financing in the presence of two standard venture capital contracting provisions: anti-dilution (ratchet) and liquidation preference. We argue that such provisions can preclude financing of a positive NPV venture in the case of a large follow-on financing relative to firm value. Liquidation preference contracting at multiples greater than one is not feasible in the later round if the financing is small relative to firm value. We highlight an interaction effect between the two provisions: increasing the liquidation multiple can help to avoid dilution and the need for the prior venture capitalist to waive ratchet provisions.     

An experimental approach to the effectiveness of an incentive system against moral hazard in the insurance market

Although traditional Japanese insurance theory has tended to assume the basic altruism of policyholders, this assumption may not be warranted. Many people might be opportunists rather than altruists. So in the actual insurance market, moral hazard may occur not accidentally but naturally. Without effective incentive mechanisms, policyholders may deviate from their original purpose. It is important to design penalties as negative incentives for the control and prevention of moral hazard. We test these propositions here by means of a game theory and questionnaire. The reason why we use a game theory and carry out the questionnaire is that it is not suitable to apply the econometric model to collect reliable data about moral hazard.     

Imperfect financial contracting and macroeconomic stability

This paper studies the implications of imperfect financial contracting for macroeconomic stability in the context of a stochastic dynamic general equilibrium model. We find that the equilibrium growth path might be indeterminate in an economy with financing frictions even if the aggregate production function exhibits constant returns to scale. Self-fulfilling expectations about the future price of capital lead to macroeconomic fluctuations in this economy.     

Local facility hazard risk controversy and non-local hazard risk perception

Facility siting disputes are as much about the socio-politics in a place as they are about the risks posed by the facility; yet not much is known about how localized controversy about one hazard effects the perception of other, non-local, hazard risks. Our exploratory study tests the idea that a local facility risk controversy (landfill expansion) is tied to an overall sensitivity to risks from a wider range of potentially hazardous facilities. We use logistic regression models of questionnaire survey responses from 205 residents living near two landfills that were recently expanded or proposed to be expanded. Psychometric risk variables, cultural theory of risk variables, and sociodemographic variables are used as controls to see if risk-in-place/context variables related to threat and governance (e.g. fairness and fiduciary equity) predict not only risk from the landfill but also risk from three other potentially hazardous facilities (incinerator, chemical, and nuclear). The risk-in-place/context variables are predictive across all hazards but there is little consistency in the mix of predictors across models. The results suggest that facility controversy is linked to how residents view risks from non-local facility hazards and that this effect varies by place. This points to the need for more research in this area, and is suggestive that risk-hazard controversy may foster localized risk-averse places or wider risk-averse communities.