Robust Contracts in Continuous Time

Jianjun Miao and Alejandro Rivera

No 2013-009, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We study two types of robust contracting problem under hidden action in continuous time. In type I problem, the principal is ambiguous about the project cash flows, while he is ambiguous about the agent’s beliefs in type II problem. The principal designs a robust contract that maximizes his utility under the worst-case scenario subject to the agent’s incentive and participation constraints. We implement the optimal contract by cash reserves, debt and equity. In addition to receiving ordinary dividends when cash reserves reach a threshold, outside equity holders also receive special dividends or inject cash in the cash reserves to hedge against model uncertainty. Ambiguity aversion lowers outside securities value and raises the credit yield spread. It generates equity premium for type I problem, but not for type II problem. The equity premium and the credit yield spread are state dependent and high for distressed firms with low cash reserves.

Keywords: robustness; ambiguity; moral hazard; principal-agent problem; capital struc- ture; equity premium; asset pricing (search for similar items in EconPapers)
Pages: 60
Date: 2013-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.bu.edu/econ/files/2014/05/Miao-Robust-Contracts-in-April-2013.pdf First version, 2013 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (http://www.bu.edu/econ/files/2014/05/Miao-Robust-Contracts-in-April-2013.pdf [301 Moved Permanently]--> https://www.bu.edu/econ/files/2014/05/Miao-Robust-Contracts-in-April-2013.pdf)

Related works:
Journal Article: Robust Contracts in Continuous Time (2016)
Journal Article: Robust Contracts in Continuous Time (2016)
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:bos:wpaper:wp2013-009

Access Statistics for this paper

More papers in Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Program Coordinator ().