Bank monitoring incentives under moral hazard and adverse selection
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Publication:2302840
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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Cited in
(12)- Optimal securities under adverse selection and moral hazard
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