A reconsideration of the Jensen-Meckling model of outside finance

Martin Hellwig

Journal of Financial Intermediation, 2009, vol. 18, issue 4, 495-525

Abstract: The paper studies outside finance in a model of two-dimensional moral hazard, involving risk choices as well as effort choices. If the entrepreneur has insufficient funds, a first-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than first-best outcomes. For a Cobb-Douglas technology, second-best effort and investment levels are smaller than first-best; for other technologies, the comparison depends on the elasticity of substitution. If firm returns are not too noisy as signals of behaviour, the optimal incentive scheme corresponds to some mix of debt and equity finance. If firm returns are too noisy, this interpretation is not available.

Keywords: Financial; contracting; Debt; finance; Equity; finance; Moral; hazard; Risk; choices (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042-9573(07)00065-4
Full text for ScienceDirect subscribers only

Related works:
Working Paper: A Reconsideration of the Jensen-Meckling Model of Outside Finance (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:18:y:2009:i:4:p:495-525

Access Statistics for this article

Journal of Financial Intermediation is currently edited by Elu von Thadden

More articles in Journal of Financial Intermediation from Elsevier
Bibliographic data for series maintained by Catherine Liu ().