Moral-hazard credit cycles with risk-averse agents

Roger Myerson

Journal of Economic Theory, 2014, vol. 153, issue C, 74-102

Abstract: We consider a simple overlapping-generations model with risk-averse financial agents subject to moral hazard. Efficient contracts for such financial intermediaries involve back-loaded late-career rewards. Compared to the analogous model with risk-neutral agents, risk aversion tends to reduce the growth of agents' responsibilities over their careers. This moderation of career growth rates can reduce the amplitude of the widest credit cycles, but it also can cause small deviations from steady state to amplify over time in rational-expectations equilibria. We find equilibria in which fluctuations increase until the economy enters a boom/bust cycle where no financial agents are hired in booms.

Keywords: Moral hazard; Credit cycles (search for similar items in EconPapers)
JEL-codes: D86 E10 E32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Moral hazard credit cycles with risk-averse agents (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:153:y:2014:i:c:p:74-102

DOI: 10.1016/j.jet.2014.05.009

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