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Moral Hazard, Agency Costs, and Asset Prices in a Competitive Equilibrium

Published online by Cambridge University Press:  06 April 2009

Ram T. S. Ramakrishnan  and
Anjan V. Thakor
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Extract

The behavior of economic agents in the presence of uncertainty about exogenous events and imperfect information about the endogenously influenced actions of other agents with whom they contract has been receiving growing attention. In particular, the economic theory of agency explicitly recognizes that when agents enter into synergistic relationships, each agent will act in a manner consistent with the maximization of its personal welfare, thus giving rise to a phenomenon called moral hazard. Harris and Raviv [8], Holmström [10], and Shavell [21] have analyzed the nature of Pareto-optimal contractual mechanisms designed to ameliorate moral hazard and achieve efficient risk sharing. Jensen and Meckling [12], Grossman and Hart [6], and Thakor and Gorman [22] have explored the impact of moral hazard on the capital structure decisions of firms. Arrow [1] explained the absence of complete contingent claims markets on the basis of moral hazard, and Harris and Raviv [7] have examined the impact of moral hazard on the structure of health insurance contracts.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 17 , Issue 4 , November 1982 , pp. 503 - 532
Copyright
Copyright © School of Business Administration, University of Washington 1982

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