Skin in the Game and Moral Hazard
Chemla, Gilles; Hennessy, Christopher A. (2014), Skin in the Game and Moral Hazard, The Journal of Finance, 69, 4, p. 1597–1641. 10.1111/jofi.12161
TypeArticle accepté pour publication ou publié
Journal nameThe Journal of Finance
American Finance Association
MetadataShow full item record
Dauphine Recherches en Management [DRM]
Hennessy, Christopher A.
London Business School
Abstract (EN)What determines equilibrium securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase asset quality, subsequently having private information regarding quality when selling ABS to rational investors. In equilibrium, all originators have low/zero retentions if they are financially constrained and/or prices are su¢ ciently informative. Asymmetric information lowers effort incentives in all equilibria. Effort is promoted by junior retentions, investor sophistication, andinformative prices. Optimal regulation promotes effort while accounting for investor-level externalities. It entails either a menu of junior retentions or a single junior retention with sizedecreasing in price informativeness. Mandated market opacity is only optimal amongst regulations failing to induce originator effort.
Subjects / Keywordsmoral hazard; skin in the game; Securitization; risk-sharing
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