Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
961100 | Journal of Financial Intermediation | 2009 | 31 Pages |
Abstract
The paper studies outside finance in a model of two-dimensional moral hazard, involving risk choices as well as effort choices. If the entrepreneur has insufficient funds, a first-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than first-best outcomes. For a Cobb-Douglas technology, second-best effort and investment levels are smaller than first-best; for other technologies, the comparison depends on the elasticity of substitution. If firm returns are not too noisy as signals of behaviour, the optimal incentive scheme corresponds to some mix of debt and equity finance. If firm returns are too noisy, this interpretation is not available.
Related Topics
Social Sciences and Humanities
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Authors
Martin F. Hellwig,