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arXiv · 1701.05864

Bank monitoring incentives under moral hazard and adverse selection

Nicolás Hernández Santibáñez·Dylan Possamaï·Chao Zhou
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Abstract

In this paper, we extend the optimal securitisation model of Pag\`es [50] and Possama\"i and Pag\`es [51] between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitani\'c, Wan and Yang [14], we characterise explicitly and rigorously the so-called credible set of the continuation and temptation values of the bank, and obtain the value function of the investor as well as the optimal contracts through a recursive system of first-order variational inequalities with gradient constraints. We provide a detailed discussion of the properties of the optimal menu of contracts.

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Nicolás Hernández Santibáñez, Dylan Possamaï, Chao Zhou. 2017-01-20. Bank monitoring incentives under moral hazard and adverse selection. https://arxiv.org/abs/1701.05864

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