Moral Hazard,Dividends, and Risk in Banks

In non‐financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk‐taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk‐taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk‐taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk‐taking.     

Leverage and Risk Taking under Moral Hazard

Journal of Financial Services Research - In this paper, I analyze the effectiveness of different capital regulations in mitigating the effects of moral hazard that exists only for systemically...     

On Optimal Insurance in the Presence of Moral Hazard

This paper expounds on the importance of identifiabilty of subjective probabilities in agency theory with moral hazard. An application to insurance is examined.     

Moral Hazard and Optimal Subsidiary Structure for Financial Institutions

Banks and related financial institutions often have two separate subsidiaries that make loans of similar type but differing risk, for example, a bank and a finance company, or a “good bank/bad bank” structure. Such “bipartite” structures may prevent risk shifting, in which banks misuse their flexibility in choosing and monitoring loans to exploit their debt holders. By “insulating” safer loans from riskier loans, a bipartite structure reduces risk‐shifting incentives in the safer subsidiary. Bipartite structures are more likely to dominate unitary structures as the downside from riskier loans is higher or as expected profits from the efficient loan mix are lower.     

Rediscounting under Aggregate Risk with Moral Hazard

Freeman (1999) proposes a model in which discount window lending and open‐market operations have different effects. This is important because in most of the literature these policies are indistinguishable. However, Freeman's argument that the central bank should absorb losses associated with default to provide risk sharing stands in stark contrast to the concern that central banks should limit their exposure to credit risk. We extend Freeman's model by introducing moral hazard. With moral hazard, the central bank should avoid absorbing losses and Freeman's argument breaks down. However, we show that policies resembling discount window lending and open‐market operations can still be distinguished in this new framework. The optimal policy is for the central bank to make a restricted number of creditors compete for funds. By restricting the number of agents, the central bank can limit the moral hazard problem. By making them compete with each other, the central bank can exploit market information that reveals the state of the economy.     

Leverage,Moral Hazard,and Liquidity

Financial firms raise short‐term debt to finance asset purchases; this induces risk shifting when economic conditions worsen and limits their ability to roll over debt. Constrained firms de‐lever by selling assets to lower‐leverage firms. In turn, asset–market liquidity depends on the system‐wide distribution of leverage, which is itself endogenous to future economic prospects. Good economic prospects yield cheaper short‐term debt, inducing entry of higher‐leverage firms. Consequently, adverse asset shocks in good times lead to greater de‐leveraging and sudden drying up of market and funding liquidity.     

创业企业中的双边道德风险与最优融资合约

创业家和创业资本家都付出不可观察的努力来提高企业的效率,创业企业面临双边道德风险.本文解释了创业企业融资合约中常见的可转换证券的融资安排.当创业家和创业资本家的联合努力有助于提高项目的收益时,双方的努力程度与投资的数量相关.论文证明当投资者的投资比例低时,她必须被赋予普通股,而当其投资比例高时,她获得可转换债券或优先股.此外,通过比较三种创业投资市场结构下最优合约的特征,本文表明在创业投资市场中,垄断比竞争更能有效率地控制双向道德风险.     

Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies

We propose a theory of information gathering agencies in a world of informational asymmetries and moral hazard. In a setting in which true firm values are certified by screening agents whose payoffs depend on noisy ex post monitors of information quality, the formation of information gathering agencies (groups of screening agents) is justified on two grounds. First, it enables screening agents to diversify their risky payoffs. Second, it allows information sharing. The first effect itself is insufficient despite the risk aversion of screening agents and the stochastic independence of the monitors used to compensate them.     

Optimal Contracts Under Adverse Selection and Moral Hazard: A Continuous-Time Approach

This article presents a continuous-time agency model in thepresence of adverse selection and moral hazard with a risk-averseagent and a risk-neutral principal. Under the model setup, weshow that the optimal controls are constant over time, and thusthe optimal menu consists of contracts that are linear in thefinal outcome. We also show that when a moral hazard problemadds to an adverse selection problem, the monotonicity conditionwell known in the pure adverse selection literature needs tobe modified to ensure the incentive compatibility for informationrevelation. The model is applied to a few managerial compensationproblems involving managerial project selection and capitalbudgeting decisions. We argue that in the third-best world,the relationship between the volatility of the outcome and thesensitivity of the contract depends on interactions betweenthe managerial cost and the firm’s production functions.Contrary to conventional wisdom, sometimes the higher the volatility,the higher the sensitivity of the contract. The firm receivinggood news sometimes chooses safer projects or invests less thanit does with bad news. We also examine the effects of the observabilityof the volatility on corporate investment decisions.     

道德风险与金融危机

不可否认,当前的金融危机给政策的面貌带来了翻天覆地的冲击.在一个接一个的国家里,我们看到政府恐慌地做出膝跳反射似的反应,并把他们的政策手册扔到一边:前所未有的救助和国有化开始出现,审慎的财政政策灰飞烟灭,毫无保留的凯恩斯主义已经回归.很多人宣称,我们尝试的自由市场已经失败,现在应该进行更广泛的监管和更积极的宏观经济管理.     

Liquidity Coinsurance, Moral Hazard, and Financial Contagion

We study the propagation of financial crises among regions in which banks are protected by limited liability and may take excessive risk. The regions are affected by negatively correlated liquidity shocks, so liquidity coinsurance is Pareto improving. The moral hazard problem can be solved if banks are sufficiently capitalized. Under autarky a limited amount of capital is sufficient to prevent risk‐taking, but when financial markets are open capital becomes insufficient. Thus, bankruptcy occurs with positive probability and the crisis spreads to other regions via financial linkages. Opening financial markets is nevertheless Pareto improving; consumers benefit from liquidity coinsurance, although they pay the cost of excessive risk‐taking.     

Deposit Insurance, Moral Hazard and Market Monitoring

The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks' liabilities.     

存在道德风险的医院等级选择与最优公共医疗保险合同

通过构造一个医疗服务系统的均衡模型,分析了医院等级、居民道德风险与最优公共医疗保险合同之间的关系。研究表明只存在公共医疗保险体系时,如果政府部门之间缺乏协调机制,各自为政,中国的公共医疗保险支付方式将不能实现社会最优并消除道德风险;公共医疗保险合同可能引起社会福利的损失或引致道德风险。政府应该完善医院评价系统,对不同医院的水平给予准确的评级,特别是要建立起政府各部门之间的协调机制;理顺医疗服务价格体系;鼓励更多市场参与主体进入医疗保险领域,建立合理的疾病风险分担机制。     

Disease‐Specific Moral Hazard and Optimal Health Insurance Design for Physician Services

This article analyzes disease‐specific moral hazard effects in the demand for physician office visits and explores whether optimal insurance for physician services should be designed to have disease‐specific cost sharing. Generalized method of moments is implemented to address the endogeneity of private health insurance, and the nonnegativity and the discreteness of physician services use. The results indicate that the moral hazard effect varies considerably across disease‐specific specialist care. The strongest moral hazard (for no‐condition related specialist visits) is almost twice the moral hazard effect of the weakest (for chronic condition related specialist visits). Although the findings indicate some variation in the moral hazard effect across disease‐specific general practitioner visits, the variation is less considerable. The main policy implication is that optimal insurance for physician services should be designed to have differential cost sharing based on disease status rather than to have uniform cost sharing.     

Moral Hazard and the Portfolio Management Problem

This paper investigates the significance of nonlinear contracts on the incentive for portfolio managers to collect information. In addition, the manager must be motivated to disclose this information truthfully. We analyze three contracting regimes: (1) first-best where effort is observable, (2) linear with unobservable effort, and (3) the optimal contract within the Bhattacharya-Pfleiderer quadratic class. We find that the linear contract leads to a serious lack of effort expenditure by the manager. This underinvestment problem can be successfully overcome through the use of quadratic contracts. These contracts are shown to be asymptotically optimal for very risk-tolerant principals.     

Skin in the Game and Moral Hazard

What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first‐best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal among regulations inducing zero effort.     

Asset Liquidity,Moral Hazard,and Bank Loan Rescheduling

We analyze the bank's decision to reschedule or to foreclose on a loan in default and the borrower's decision to divert lender-financed assets to personal use, i.e., to consume the assets. We show that the debt of borrowers in financial distress that have substantial intangible or highly specialized assets—i.e., illiquid assets—is likely to be rescheduled. Alternatively, banks will likely foreclose on borrowers in distress that have assets that are difficult to monitor. It is the interaction of the asset's liquidity and the borrower moral hazard that helps determine the nature of the equilibrium. When the condition of the borrower upon default is observable, we find that suboptimal foreclosures are possible but reschedulings are always optimal; when the borrower's condition is private information, however, reschedulings may also be suboptimal. Additionally, borrowers whose lenders foreclose are more impaired then those whose debt is rescheduled. Finally, we show that randomization of the rescheduling/foreclosure decision by the bank and the decision to consume by the borrower may be optimal for particular assets.     

Adverse Selection, Moral Hazard, and Outlier Payment Policy

In this article, we analyze the rationale for introducing outlier payments into a prospective payment system for hospitals under adverse selection and moral hazard. The payer has only two instruments: a fixed price for patients whose treatment cost is below a threshold     and a cost-sharing rule for outlier patients. We show that a fixed-price policy is optimal when the hospital is sufficiently benevolent. When the hospital is weakly benevolent, a mixed policy solving a trade-off between rent extraction, efficiency, and dumping deterrence must be preferred. We show how the optimal combination of fixed price and partially cost-based payment depends on the degree of benevolence of the hospital, the social cost of public funds, and the distribution of patients severity.