Bank monitoring incentives under moral hazard and adverse selection

Nicolás Hernández Santibáñez, Dylan Possamaï () and Chao Zhou ()
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Nicolás Hernández Santibáñez: DIM - Departamento de Ingeniera Matematica [Santiago], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Dylan Possamaï: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Chao Zhou: NUS - National University of Singapore

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Abstract: In this paper, we extend the optimal securitization model of Pagès [41] and Possamaï and Pagès [42] 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 [12], we characterize 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; securitization; moral hazard; adverse selection; principal-agent problem (search for similar items in EconPapers)
Date: 2020
Note: View the original document on HAL open archive server: https://hal.science/hal-01435460v1
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Citations: View citations in EconPapers (2)

Published in Journal of Optimization Theory and Applications, 2020, 184, pp.988-1035. ⟨10.1007/s10957-019-01621-9⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01435460

DOI: 10.1007/s10957-019-01621-9

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