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Bank monitoring incentives under moral hazard and adverse selection

Nicol\'as Hern\'andez Santib\'a\~nez, Dylan Possama\"i and Chao Zhou

Papers from arXiv.org

Abstract: In this paper, we extend the optimal securitisation model of Pag\`es [50] and Possama\"i and Pag\`es [51] between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitani\'c, Wan and Yang [14], 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.

New Economics Papers: this item is included in nep-cta and nep-mic
Date: 2017-01, Revised 2019-01
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