Bank Monitoring Incentives Under Moral Hazard and Adverse Selection

Nicolás Hernández Santibáñez (), Dylan Possamaï () and Chao Zhou ()
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Nicolás Hernández Santibáñez: University of Michigan
Dylan Possamaï: Columbia University
Chao Zhou: National University of Singapore

Journal of Optimization Theory and Applications, 2020, vol. 184, issue 3, No 14, 988-1035

Abstract: Abstract In this paper, we extend the optimal securitisation model of Pagès and Possamaï between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitanić, Wan and Yang, we characterise explicitly and rigorously the so-called credible set of the continuation and temptation values of the bank, and obtain the value function of the investor as well as the optimal contracts through a recursive system of first-order variational inequalities with gradient constraints. We provide a detailed discussion of the properties of the optimal menu of contracts.

Keywords: Bank monitoring; Securitisation; Moral hazard; Adverse selection; Principal–Agent problem; 60H30; 91G40; G21; G28; G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10957-019-01621-9

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