The Library
Optimal securities under adverse selection and moral hazard
Tools
Koufopoulos, Kostas (2009) Optimal securities under adverse selection and moral hazard. Journal of Mathematical Economics, Vol.45 (No.5-6). pp. 341-360. doi:10.1016/j.jmateco.2009.03.003 ISSN 0304-4068.
|
PDF
WRAP_Koufopoulos_Optimal_Securities_under_Adverse_Selection_and_Moral_Hazard_(JME_Revised).pdf - Requires a PDF viewer. Download (350Kb) |
Official URL: http://dx.doi.org/10.1016/j.jmateco.2009.03.003
Abstract
We consider project financing under adverse selection and moral hazard and derive several interesting results. First, we provide an explanation of why good firms issue both debt and underpriced equity (even if the bankruptcy and agency costs of debt are zero). Second, we show that, in the presence of moral hazard, adverse selection may induce the conversion of negative into positive NPV projects leading to an improvement in social welfare. Third, we provide a rationale for the use of warrants. We also show that a debt–warrant combination can implement the optimal contract. Our results have a number of testable implications.
Item Type: | Journal Article | ||||
---|---|---|---|---|---|
Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Politics and International Studies | ||||
Library of Congress Subject Headings (LCSH): | Adverse selection (Insurance), Moral hazard, Charities -- Investments, Risk (Insurance), Decision making -- Mathematical models | ||||
Journal or Publication Title: | Journal of Mathematical Economics | ||||
Publisher: | Elsevier BV | ||||
ISSN: | 0304-4068 | ||||
Official Date: | 20 May 2009 | ||||
Dates: |
|
||||
Volume: | Vol.45 | ||||
Number: | No.5-6 | ||||
Page Range: | pp. 341-360 | ||||
DOI: | 10.1016/j.jmateco.2009.03.003 | ||||
Status: | Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) |
Request changes or add full text files to a record
Repository staff actions (login required)
View Item |
Downloads
Downloads per month over past year