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Author: Josef Schosser Publisher: ISBN: Category : Languages : en Pages :
Book Description
When firms want to raise external financing, why do they resort to contracts with fixed repayment, i.e., standard debt contracts? The canonical work of Gale and Hellwig (Rev Econ Stud, 52(4):647-663, 1985) gives the following answer to this question: Assuming that only the entrepreneur can observe the project's outcome free of charge, the standard debt contract proves to be an incentive-compatible financing design. However, this approach remains inadequate, as neither the lender nor the borrower is given the possibility to act strategically. The paper at hand takes up this aspect. By means of a simple game-theoretic model and focusing on a binary outcome setting, it is shown that every risky standard debt contract is dominated by at least one ownership contract. In this respect, costly state verification cannot act as a raison d'être of contracts with fixed repayment.
Author: Josef Schosser Publisher: ISBN: Category : Languages : en Pages :
Book Description
When firms want to raise external financing, why do they resort to contracts with fixed repayment, i.e., standard debt contracts? The canonical work of Gale and Hellwig (Rev Econ Stud, 52(4):647-663, 1985) gives the following answer to this question: Assuming that only the entrepreneur can observe the project's outcome free of charge, the standard debt contract proves to be an incentive-compatible financing design. However, this approach remains inadequate, as neither the lender nor the borrower is given the possibility to act strategically. The paper at hand takes up this aspect. By means of a simple game-theoretic model and focusing on a binary outcome setting, it is shown that every risky standard debt contract is dominated by at least one ownership contract. In this respect, costly state verification cannot act as a raison d'être of contracts with fixed repayment.
Author: Andrew Winton Publisher: ISBN: Category : Languages : en Pages :
Book Description
Many financial claims specify fixed maximum payments, varying seniority, and absolute priority for more senior investors. These features are motivated in a model where a firm's manager contracts with several investors and firm output can only be verified privately at a cost. Debt-like contracts of varying seniority generally dominate symmetric contracts, and when investors are risk neutral, it is optimal to use debt-like contracts where more senior claims have absolute priority over more junior claims. In addition to motivating several features of debt and preferred stock, the model offers an explanation for structures used in leverages buy-outs, asset-backed securitizations, and reinsurance contracts.
Author: Bappaditya Mukhopadhyay Publisher: ISBN: Category : Languages : en Pages : 22
Book Description
We model a lender borrower relationship in a CSV framework. The project available with the firm is characterized by first order stochastic dominance. The lender audits the borrower to prevent the latter from strategic default. In this setup, we find that the optimal contract is the standard debt contract. However, a debt contract leads to overinvestment This result is in sharp contrast to those obtained in the literature. The key to these results is that the default probability of the project can be influenced by the nature of financial contract in place. The model also offers a possible explanation for differing debt equity ratios across economies that is consistent with the existing empirical findings.
Author: John H. Boyd Publisher: ISBN: Category : Languages : en Pages :
Book Description
We investigate ex ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if implementation costs are actually nontrivial (as seem likely), standard debt contracts will be (very close to) optimal.
Author: G. Carlier Publisher: ISBN: Category : Debtor and creditor Languages : en Pages :
Book Description
We consider a simple model of lending and borrowing combining two informational problems: adverse selection and costly state verification. Our analysis highlights the interaction between these two informational problems. We notably show that the higher the monitoring cost, the less discriminating the optimal menu of contracts is.
Author: Philipp Meyer-Brauns Publisher: ISBN: Category : Languages : en Pages : 26
Book Description
This paper derives the optimal financial contract when an entrepreneur can evade taxes in a model of costly state verification. In contrast to previous literature on costly state verification and financial contracting, we find that standard debt contracts are not optimal when tax evasion is possible. Instead, the optimal contract is debt-like only for very low and very high profit realizations, and features a constant repayment and verification of returns in an intermediate range. This occurs because the entrepreneur has to be given a positive rent even under verification in order to not abuse her limited liability protection for excessive tax evasion activities.
Author: Cyril Monnet Publisher: ISBN: Category : Languages : en Pages : 45
Book Description
This paper describes optimal contracts in a dynamic costly state verification model with stochastic monitoring. An agent operates a risky project on behalf of a principal over several periods. Each period, the principal can observe the revenues from the project provided he incurs a fixed cost. We show that an optimal contract exists with the property that, in each period and for every possible revenue announcement by the agent, either the principal claims the entire proceeds from the project or promises to claim nothing in the future. This structure of payments enables the principal to minimize audit costs over the duration of the project. Those optimal contracts are such that the agent's expected income rises with time. Moreover, except in at most one period, the principal claims the entire returns of the project whenever audit occurs. We also provide conditions under which all optimal contracts must satisfy these properties.
Author: Josef Schosser
Author: Josef Schosser
Author: Andrea Attar
Author: Andrew Winton
Author: Bappaditya Mukhopadhyay
Author: John H. Boyd
Author: Robert M. Townsend
Author: Stefan Krasa
Author: G. Carlier
Author: Philipp Meyer-Brauns
Author: Cyril Monnet