Skin in the Game and Moral Hazard

Gilles Chemla and Christopher A. Hennessy
Additional contact information
Gilles Chemla: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Christopher A. Hennessy: London Business School - London Business School

Post-Print from HAL

Abstract: What determines equilibrium securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase asset quality, subsequently having private information regarding quality when selling ABS to rational investors. In equilibrium, all originators have low/zero retentions if they are financially constrained and/or prices are su¢ ciently informative. Asymmetric information lowers effort incentives in all equilibria. Effort is promoted by junior retentions, investor sophistication, andinformative prices. Optimal regulation promotes effort while accounting for investor-level externalities. It entails either a menu of junior retentions or a single junior retention with sizedecreasing in price informativeness. Mandated market opacity is only optimal amongst regulations failing to induce originator effort.

Keywords: moral hazard; skin in the game; Securitization; risk-sharing (search for similar items in EconPapers)
Date: 2014
Note: View the original document on HAL open archive server: https://hal.science/hal-01457063v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Published in The Journal of Finance, 2014, 69 (4), ⟨10.1111/jofi.12161⟩

Downloads: (external link)
https://hal.science/hal-01457063v1/document (application/pdf)

Related works:
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:hal:journl:hal-01457063

DOI: 10.1111/jofi.12161

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().