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Bank monitoring incentives under moral hazard and adverse selection

Hernández Santibáñez, Nicolás; Possamaï, Dylan; Zhou, Chao (2020), Bank monitoring incentives under moral hazard and adverse selection, Journal of Optimization Theory and Applications, 184, p. 988–1035. 10.1007/s10957-019-01621-9

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Type
Article accepté pour publication ou publié
Date
2020
Journal name
Journal of Optimization Theory and Applications
Volume
184
Publisher
Springer
Pages
988–1035
Publication identifier
Metadata
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Author(s)
Hernández Santibáñez, Nicolás
Possamaï, Dylan
Zhou, Chao
Abstract (EN)
In this paper, we extend the optimal securitization model of Pagès and Possamaï and Pagès between an investor and a bank to a setting allowing both moral hazard and adverse selection. Following the recent approach to these problems of Cvitanić, Wan and Yang, we characterize 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.
Subjects / Keywords
moral hazard; bank monitoring; securitization; adverse selection; principal-agent problem