We analyze the Pareto optimal contracts between lenders and borrowers in a model with asymmetric information. The model generalizes the Rothschild-Stiglitz pure adverse selection problem by including moral hazard. Entrepreneurs with unequal “abilities” borrow to finance alternative investment projects which differ in degree of risk and productivity. We determine the endogenous distribution of projects as functions of the amount of loanable funds, when lenders have no information about borrowers’ ability and technological choices. Then, we embed these results in a dynamic competitive economy and show that the average quality of the selected projects in equilibrium may be high in recessions and low in booms. This phenomenon may generate (a) multiple steady states, (b) a smaller impact of exogenous shocks on output relative to the full information case, (c) endogenous fluctuations.

Optimal debt contracts and moral hazard along the business cycle / Reichlin, Pietro; Siconolfi, P.. - In: ECONOMIC THEORY. - ISSN 0938-2259. - 1:24(2004), pp. 75-109. [10.1007/s00199-003-0413-0]

Optimal debt contracts and moral hazard along the business cycle

REICHLIN, PIETRO;
2004

Abstract

We analyze the Pareto optimal contracts between lenders and borrowers in a model with asymmetric information. The model generalizes the Rothschild-Stiglitz pure adverse selection problem by including moral hazard. Entrepreneurs with unequal “abilities” borrow to finance alternative investment projects which differ in degree of risk and productivity. We determine the endogenous distribution of projects as functions of the amount of loanable funds, when lenders have no information about borrowers’ ability and technological choices. Then, we embed these results in a dynamic competitive economy and show that the average quality of the selected projects in equilibrium may be high in recessions and low in booms. This phenomenon may generate (a) multiple steady states, (b) a smaller impact of exogenous shocks on output relative to the full information case, (c) endogenous fluctuations.
File in questo prodotto:
File Dimensione Formato  
DEBTCONTRACTS.pdf

Solo gestori archivio

Tipologia: Documento in Post-print
Licenza: DRM non definito
Dimensione 327.15 kB
Formato Adobe PDF
327.15 kB Adobe PDF   Visualizza/Apri
Pubblicazioni consigliate

Caricamento pubblicazioni consigliate

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/3967
Citazioni
  • Scopus 13
  • ???jsp.display-item.citation.isi??? 13
social impact