Download Handbook of Financial Intermediation and Banking (Handbooks by Anjan V. Thakor, Arnoud Boot PDF

By Anjan V. Thakor, Arnoud Boot

The expansion of monetary intermediation learn has yielded a bunch of questions that experience driven "design" concerns to the fore while the boundary among monetary intermediation and company finance has blurred. This quantity provides assessment articles on six significant subject matters which are attached by way of information-theoretic instruments and characterised by means of priceless views and significant questions for destiny learn. Touching upon quite a lot of matters bearing on the designs of securities, associations, buying and selling mechanisms and markets, constitution, and rules, this quantity will motivate daring new efforts to form monetary intermediaries sooner or later. * unique evaluation articles provide worthwhile views on learn concerns showing in most sensible journals* Twenty articles are grouped via six significant subject matters, jointly defining the major study fringe of monetary intermediation* company finance researchers will locate affinities within the instruments, tools, and conclusions featured in those articles

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Krasa and Villamil (1994) and Winton (1995) extend Townsend’s and Border and Sobel’s results to the case in which both the entrepreneur and the investor are risk averse. These studies show that optimal contracts have the properties that the payments from the entrepreneur to the investor (weakly) increase with the firm’s output x, that is, y (x) ≥ 0, and the monitoring probability p(x) decreases with the realization of output, x. Furthermore, Boyd and Smith (1994) show that, in a risk-neutral setting, with stochastic monitoring, the optimal contract does not look like a standard debt contract anymore because it involves defaults and debt forgiveness also in states in which the entrepreneur is fully able to pay the investor.

Giving investors the control rights over a firm’s assets on default (with the possible outcome of inefficient liquidation) allows investors sufficient power to extract payments from the entrepreneur. Hence, control rights become a critical feature of the debt contract. In Bolton and Scharfstein (1990) the entrepreneur has no wealth and is endowed with a technology lasting for two periods. In each period, the technology requires a fixed investment I and generates a level of output xt ε {x, x}, with x < x.

In a similar vein, Povel and Raith (2004) consider a version of Hart and Moore’s (1998) model in which the level of investment I and the entrepreneurial action a may not be observable (and thus contractible) by the investor. The unobservable action a may be interpreted either as entrepreneurial effort or as the choice of a risky project (generating risk shifting). Povel and Raith show that the optimal contract is again a debt contract, in which the probability of liquidating the project is chosen optimally to induce the entrepreneur either to invest in the project or to exert effort or to choose a project with a desirable risk profile.

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