Optimal contract under asymmetric information: the role of options on futures

Andrea Beccarini

No 1911, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: The aim of this paper is to show that an option on an appropriate future may solve some market failures caused by asymmetric information. Some models related to the adverse selection, moral hazard and verification costs are analyzed and the performance of these options on futures is evaluated. The typical situation regards a consumer (or an investor) who wishes to discount his/her future income in order to finance his/her present consumption (investment); under asymmetric information this agent may incur in liquidity constraints (credit rationing), which is not the case when buying the option on a futures contract. This contract is constructed so that the (future) agent’s income is correlated with some futures contract (but this is private information) on which the option is issued. Some examples show that this is not a very stringent assumption.

Keywords: Asymmetric information; credit rationing; options on futures (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-02
New Economics Papers: this item is included in nep-bec, nep-cis and nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:1911

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