Debt and equity as optimal contracts

Joao Santos

No 9505, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: Using a principal-agent model in which an entrepreneur has an investment project whose returns depend on his effort, which is not observable by the financier, the author shows that the optimal contract used to finance such a project can be replicated by a unique combination of debt and equity, proving the optimality of these financial instruments. ; A look at the evolution of the collection, clearinghouse, and regulatory provisions of the Federal Reserve Act. The Reserve Banks? check collection service was designed in 1913 to serve as \"glue,\" attaching the new central bank to the commercial and financial markets through member banks.

Keywords: Contracts; Corporations - Finance (search for similar items in EconPapers)
Date: 1995
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Journal Article: Debt and equity as optimal contracts (1997)
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