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Privately optimal contracts and suboptimal outcomes in a model of agency costs

Charles Carlstrom, Timothy Fuerst and Matthias Paustian
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Matthias Paustian: https://www.federalreserve.gov/econres/matthias-o-paustian.htm

No 1239, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner?s allocations.

Keywords: Equilibrium (Economics) - Mathematical models; Financial markets; Macroeconomics (search for similar items in EconPapers)
Pages: 40 pages
Date: 2013
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

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Working Paper: Privately optimal contracts and suboptimal outcomes in a model of agency costs (2012) Downloads
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