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Moral Hazard Problems (moral + hazard_problem)
Selected AbstractsRANDOM PENALTIES AND RENEWABLE RESOURCES: A MECHANISM TO REACH OPTIMAL LANDINGS IN FISHERIESNATURAL RESOURCE MODELING, Issue 3 2009FRANK JENSEN Abstract Recent literature considers illegal landings a moral hazard problem that arises because individual landings are unobservable. The literature proposes incentive schemes to solve the information problem. However, most of the proposed schemes raise huge information requirements and social budget balance is not secured. In this paper, we suggest a random penalty mechanism that reduces the information requirements and secures budget balance in the case of a given number of licensed vessels. In the random penalty mechanism, aggregate landings are measured through stock sizes and the natural growth function. If aggregate landings are below optimal landings, each fisherman receives a subsidy. If aggregate catches are above optimal landings, the mechanism works such that either the fisherman is randomly selected and pays a fine or the fisherman is not selected and receives a subsidy. The fine and subsidy can be designed such that budget balance is secured. Provided risk aversion is sufficiently large and the fine is high enough, the random penalty mechanism will generate optimal individual landings. The budget balance combined with risk aversion drives the result for this advanced tax/subsidy system that does not exhaust the resource rents. The budget balance creates interdependence between fishermen that secure optimality. [source] WEALTH EFFECT OF PUBLIC FUND INJECTIONS TO AILING BANKS: DO DEFERRED TAX ASSETS AND AUDITING FIRMS MATTER?,THE JAPANESE ECONOMIC REVIEW, Issue 4 2007NOBUYOSHI YAMORI This paper examines the wealth effect on other banks by the public fund injection into Resona Bank. This paper finds that the injection initially conveyed the auditing firms' strict stance towards deferred tax assets. More importantly, the procedure that the government employed was regarded by market participants as a too-big-to-fail policy. Therefore, although the Resona injection was effective in obviating a financial crisis, the policy was inevitably accompanied with the moral hazard problem. [source] MORAL HAZARD AND LABOUR-MANAGED FIRMS IN ITALY AFTER THE LAW N. 142/2001ANNALS OF PUBLIC AND COOPERATIVE ECONOMICS, Issue 2 2008Francesco REITO ABSTRACT,:,Instead of focusing on the difference between a labour-managed (LMF) and a profit maximizing firm (PMF) in terms of final out-come and occupation, this paper considers the actual possibility for a firm to be financed from outside. A simple case of moral hazard in the credit market is analyzed. A bank, for limited funds, can finance one of two potential firms, a LMF or a PMF, both with similar project size. The Italian case is taken into account: the law n. 142/2001 has equalized the position of workers and members of a LMF as (own) firm creditors during a liquidation. This has an effect on the structure of creditors priorities in case a firm goes bankrupt and, in particular, on money-lenders likelihood of getting their loans back. It is argued that, before the law, the LMF had in general an advantage on the PMF, from banks viewpoint, for it faced a lower moral hazard problem on effort contribution. After the law, even though the direct consequence seems to be a draw back in LMF credit-worthiness, the model shows that, on given conditions, this type of firm remains more competitive as a bank borrower. [source] The Effect of Venture Capital Financing on the Sensitivity to Cash Flow of Firm's InvestmentsEUROPEAN FINANCIAL MANAGEMENT, Issue 4 2010Fabio Bertoni G32; D92; G23 Abstract This work studies the effect of venture capital (VC) financing on firms' investments in a longitudinal sample of 379 Italian unlisted new-technology-based firms (NTBFs) observed over the 10-year period from 1994 to 2003. We distinguish the effects of VC financing according to the type of investor: independent VC (IVC) funds and corporate VC (CVC) investors. Previous studies argue that NTBFs are the firms most likely to be financially constrained. The technology-intensive nature of their activity and their lack of a track record increase adverse selection and moral hazard problems. Moreover, most of their assets are firm-specific or intangible and hence cannot be pledged as collateral. In accordance with this view, we show that the investment rate of NTBFs is strongly positively correlated with their current cash flows. We also find that after receiving VC financing, NTBFs increase their investment rate independently of the type of VC investor. However, the investments of CVC-backed firms remain sensitive to shocks in cash flows, whereas IVC-backed firms exhibit a low and statistically not significant investment,cash flow sensitivity that we interpret as a signal of the removal of financial constraints. [source] Insurance, Bond Covenants, and Under- or Over-investment With Risky Asset ReconstitutionJOURNAL OF RISK AND INSURANCE, Issue 1 2007Arthur HauArticle first published online: 8 MAR 200 Traditional theory predicts that the shareholders of a limited liability company financed partly by bonds may underinvest by not replacing damaged company assets. It also precludes the possibility of overinvestment. By relaxing the restrictive assumption maintained under traditional theory, namely, that the effects of reconstituting damaged assets are nonstochastic, this article shows that both over and underinvestment are possible. It is shown that these moral hazard problems can be mitigated by incorporating appropriate insurance requirements into bond covenants. Moreover, it is shown that the insurance requirements for alleviating underinvestment and overinvestment are quite different. Particularly, for underinvestment, the required insurance only needs to make the bonds riskless in the best asset reconstitution states of the loss states in which the company value falls short of the promised bond repayment; however, for overinvestment, the required insurance should make the bonds totally riskless. The difference in insurance requirements is especially important when insurance is actuarially unfavorable such that more-than-required insurance is always undesirable. [source] Task assignment, incentives and technological factorsMANAGERIAL AND DECISION ECONOMICS, Issue 1 2009Maria De Paola In this paper, we examine the allocation of tasks between a principal and an agent considering their incentives to provide effort, their different abilities in handling tasks, and transmission costs. We focus our attention on two tasks: the first may be handled by the principal or by the agent, whereas the second is necessarily carried out by the agent. Under a fully decentralised organisation, the agent performs both tasks, whereas, under partial delegation, the principal handles the first task and transfers the outcome to the agent who handles the second task. Assuming technological complementarities, from our analysis it emerges that, if there is imperfect observability of effort, full delegation is better at eliciting effort by the agent in the second task, whereas, in comparison with partial delegation, it lowers effort in the first task. Although with contractible effort, the choice between the two organisational forms depends only on transmission costs and on the relative ability of its members, when moral hazard problems are taken into account, the organisational choice is related to the relative importance played by the two tasks in production. If the agent's task is relatively important in production, full delegation, encouraging a higher level of effort in this task, may be optimal, even if technological factors favour partial delegation. Copyright © 2008 John Wiley & Sons, Ltd. [source] Anreizkompatibilität als zentrales Element eines neu gestalteten GesundheitsmarktesPERSPEKTIVEN DER WIRTSCHAFTSPOLITIK, Issue 3 2004Thomas Gries Frequently, administrative rules defined by the government or private health (doctor) associations dominate the allocation mechanisms of the health system. These administrative rules along with asymmetric information often cause moral hazard problems leading to vast inefficiencies in the ,Physician-Patient-Market". Therefore, the discussion of efficient health systems should focus on the problem of compatible incentives within the allocation system of the health sector. Even more, without incentive consistency instruments recently suggested to cure the inefficiency of the German system like ,Managed Care", ,Disease Management" or ,Diagnosis Related Groups" will not be able to improve the efficiency of the health system. Introducing these instruments without a full incentive , compatible allocation system covering all segments of the health system will just shift the problem of asymmetric information and moral hazard to another sub-market of the system, the ,Health Insurance,Patient-Market". Therefore, the intention of the paper is to identify the major elements of a suitable incentive , compatible allocation scheme for the health market. Further, we propose an independent evaluation and information institution as a major tool to cure the problem of asymmetric information in the health market. [source] On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity,THE ECONOMIC JOURNAL, Issue 536 2009Ernst Fehr We study the impact of reputational incentives in markets characterised by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterised by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks. [source] FINANCIAL CONTRACTING BETWEEN MANAGERS AND VENTURE CAPITALISTS: THE ROLE OF VALUE-ADDED SERVICES, REPUTATION SEEKING, AND BARGAINING POWERTHE JOURNAL OF FINANCIAL RESEARCH, Issue 4 2004Richard Fairchild Abstract I analyze manager and venture capitalist bargaining over the financial contract in the face of double-sided moral hazard problems. The allocation of cash flows depends on the combined effects of value-added services, reputation seeking, and bargaining power. Welfare is maximized when the venture capitalist has high value-adding capabilities, the market for reputation is informationally efficient, and the manager has bargaining power. Furthermore, I consider the effect of exit strategies on the financial agreement. I also consider bidding between venture capitalists of differing abilities. Generally, the superior venture capitalist wins with a lower bid, but in some cases the inferior venture capitalist can win. [source] | ||||||||||