Collateral and competitive equilibria with moral hazard and private information

Article Abstract:

The authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications. Both moral hazard and adverse selection are considered. The principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts. Specifically, some well-known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept. Two somewhat surprising results emerge. First, high-quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits. Second, high-quality borrowers may put up more collateral. (Reprinted by permission of the publisher.)

Research, Contracts, Secured transactions, Credit, Loans

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Private versus public ownership: investment, ownership distribution, and optimality

Article Abstract:

Examined in this paper is the choice between private and public incorporation of an asset for an entrepreneur (asset owner) who hires a manager with superior information about the asset's return distribution. Public sale of equity is shown to be the preferred alternative when (a) capital market issue costs are low or (b) the asset's idiosyncratic risk is high and the owner is either sufficiently risk averse or sufficiently "optimistic" about the asset's expected return. Thus, those assets deemed most valuable by their owners will tend to be publicly incorporated. The paper also explores the impact of incorporation mode - private versus public - and information structure on the firm's investment policy and ownership distribution. (Reprinted by permission of the publisher.)

Finance, Equity (Law), Incorporation

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Is fairly priced deposit insurance possible?

Article Abstract:

We analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies it is impossible to implement risk-sensitive, incentive-compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance. (Reprinted by permission of the publisher.)

Prices and rates, Deposit insurance

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