 Multidimensional skin in the gameMarc Gürtler and Florian Koch Journal of Mathematical Economics, 2021, vol. 97, issue C Abstract: We analyze the alignment of incentives between an originator and investors in a Bayesian equilibrium model that reflects securitization. It involves private types of originators, differing by marginal cost of effort. This model is the first to consider refunding and risk transfer, that is, both major welfare benefits of securitization, and the empirical finding of a non-monotonic relationship between the subordination level of claims and their sensitivity to the originator’s effort. On this basis, our equilibrium model is the first to explain why horizontal retention prevails in some market environments and vertical retention results in other market environments. More specifically, we show that a strong need for refunding, compared to risk transfer, is an argument for horizontal retention. Furthermore, horizontal retention prevails in equilibria with high effort levels, whereas vertical retention arises rather in equilibria with lower effort levels. Our results indicate new ways to regulate cash flow retention in securitization markets efficiently. Keywords: Effort sensitivity structure; Moral hazard; Multidimensional retention; Regulation; Securitization (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:97:y:2021:i:c:s030440682100104x DOI: 10.1016/j.jmateco.2021.102541 Access Statistics for this article Journal of Mathematical Economics is currently edited by Atsushi (A.) Kajii More articles in Journal of Mathematical Economics from Elsevier |
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