Economics at your fingertips  

Diversification and Screening

Guido Maretto

FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia

Abstract: I study two-way effects between financial markets and contractual agreements with a risk sharing component, such as compensation packages within a firm, or mortgages and loans. I construct a model with many Units, in each of which one of the contracting individuals, the Agent, has private information, while the uninformed individual, the Principal, has the opportunity to trade with the Principals in other Units. I give general conditions under which financial markets induce a transfer of risk from Agents to Principals. I also show how asymmetric information interacts with financial markets through two channels. First, the distortion of the allocation of the high risk Agents, feeds back in the market portfolio increasing risk on markets, and in the contracts of the low risk Agents. Secondly, markets change the Principals' screening problem preventing low risk Agents from enjoying an information rent. The model results can explain empirical evidence from the subprime mortgage market during the securitization boom leading to the 2008 financial crisis and suggest further implications for other markets segment. JEL codes:

Pages: 48 pages
Date: 2017
New Economics Papers: this item is included in nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)

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:

Access Statistics for this paper

More papers in FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia Contact information at EDIRC.
Bibliographic data for series maintained by Susana Lopes ().

Page updated 2020-02-15
Handle: RePEc:unl:unlfep:wp610