|
on Contract Theory and Applications |
| By: | Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30) |
| Abstract: | This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice in two different environments, one with risk and one with ambiguity. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. JEL Classification: D86, D82, D81. |
| Keywords: | Agency Costs,Delegation,Flexibility,Imprecision Aversion,Multiple Priors |
| Date: | 2015–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-01238046&r=cta |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Malekan, Sara (HEC Montreal, Canada Research Chair in Risk Management) |
| Abstract: | We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional distribution of portfolio losses, yet the current regulations propose a constant retention rate. |
| Keywords: | Securitization; optimal retention; moral hazard; principal-agent model; tranching; credit enhancement; conditional loss distribution. |
| JEL: | D80 D82 D86 G18 G21 G23 |
| Date: | 2015–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2015_004&r=cta |
| By: | Kimiko Terai (Faculty of Economics, Keio University); Amihai Glazer (Department of Economics, University of California, Irvine) |
| Abstract: | Agents benefit from having the principal believe that they share his preferences, whereas the principal may prefer that agents reveal their types. Such incentives are explored in a model which considers a principal who sets a budget in each of two periods, that each of the two agents allocates among different services. In the second period, the principal, having observed the agents' behavior in the first period, gives a larger budget to the agent he believes more likely shares the principal's preferences. Each agent may behave strategically, spending his budget on the service he thinks the principal prefers, thereby hiding his type. The principal may induce agents to reveal their types by hiding from them his preferences, or by giving them a large budget in the initial period. Such an approach, however, may lead agents in the initial period to spend too much on services the principal little values. |
| Keywords: | delegation, budget, hidden information, fedeCognitive and Non-cognitive Abilities |
| JEL: | D73 D82 H77 |
| Date: | 2015–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2015-012&r=cta |