Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T07:05:12.389Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Arrow, Kenneth J. “Limited Information and Economic Analysis.” The American Economic Review, Vol. 31 (1974), pp. 1–10.Google Scholar
[2]Baron, David. “On the Relationship between Complete and Incomplete Financial Market Models.” International Economic Review, Vol. 20, No. 1 (02 1979), pp. 105–117.CrossRefGoogle Scholar
[3]Beaver, William. “The Behavior of Security Prices and Its Implications for Accounting Research (Methods).” Supplement to Accounting Review, Vol. 47 (1972), pp. 407–437.Google Scholar
[4]Diamond, Douglas W., and Verrechia, Robert E.. “Optimal Managerial Contracts and Equilibrium Security Prices.” The Journal of Finance, Vol. 37, No. 2 (05 1982), pp. 275–288.CrossRefGoogle Scholar
[5]Gonedes, Nicholas. “The Capital Market, the Market for Information, and External Accounting.” The Journal of Finance, Vol. 31, No. 2 (05 1976), pp. 611–630.Google Scholar
[6]Grossman, Sanford J., and Hart, Oliver D.. “Corporate Financial Structure and Managerial Incentives.” Working paper No. 21–79, Rodney L. White Center for Financial Research, University of Pennsylvania (1979).Google Scholar
[7]Harris, Milton, and Raviv, Artur. “Some Results on Incentive Contracts with Applications to Education and Employment, Health Insurance, and Law Enforcement.” The American Economic Review, Vol. 68, No. 1 (03 1978), pp. 20–30.Google ScholarPubMed
[8]Harris, Milton, and Raviv, Artur. “Optimal Incentive Contracts with Imperfect Information.” Journal of Economic Theory, Vol. 20 (04 1979), pp. 231–259.Google Scholar
[9]Holmström, Bengt. “On Incentives and Control in Organizations.” Unpublished Ph.D. dissertation, Graduate School of Business, Stanford University (1977).Google Scholar
[10]Holmström, Bengt. “Moral Hazard and Observability.” The Bell Journal of Economics, Vol. 10, No. 1 (Spring 1979), pp. 74–91.Google Scholar
[11]Holmström, Bengt. “Moral Hazard in Teams.” Working paper, Northwestern University (02 1981).Google Scholar
[12]Jensen, Michael, and Meckling, William. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, Vol. 3, No. 4 (10 1976), pp. 305–360.Google Scholar
[13]Mirrlees, James. “Notes on Welfare Economics, Information and Uncertainty.” In Essays on Economic Behavior under Uncertainty, Balch, M., McFaden, D. and Wu, S., (eds.) Amsterdam: North Holland Publishing Co. (1974).Google Scholar
[14]Ng, David S. “Supply and Demand of Auditing Services and the Nature of Regulations in Auditing.” Arthur Young Professors' Roundtable Conference Proceedings (1978).Google Scholar
[15]Ng, David S., and Stoeckenius, Jan. “Auditing, Incentives and Truthful Reporting.” Manuscript, Graduate School of Business, Stanford University (04 1979).CrossRefGoogle Scholar
[16]Ramakrishnan, T. S., and Thakor, Anjan V.. “Some Notes on Optimal Managerial-Incentive Contracts and Imperfect Information.” Unpublished manuscript (02 1980).Google Scholar
[17]Ramakrishnan, T. S., and Thakor, Anjan V.. “The Valuation of Assets under Moral Hazard.” Massachusetts Institute of Technology, Working paper 1248–81 (05 1982).Google Scholar
[18]Ross, Stephen A. “On the Economic Theory of Agency and the Principle of Similarity.” Ch. 8 of Essays on Economic Behavior under Uncertainty, Balch, M., McFadden, D., and Wu, S., (eds.). Amsterdam: North Holland Publishing Co. (1974).Google Scholar
[19]Ross, Stephen A. “The Arbitrage Theory of Capital Asset Pricing.” Journal of Economic Theory, Vol. 13 (12 1976), pp. 341–360.Google Scholar
[20]Ross, Stephen A. “Equilibrium and Agency– –Inadmissible Agents in the Public Agency Problem.” American Economic Review, Vol. 69, No. 2 (05 1979), pp. 308–312.Google Scholar
[21]Shavell, Steven. “Risk Sharing and Incentives in the Principal and Agent Relationship.” The Bell Journal of Economics, Vol. 10, No. 1 (Spring 1979), pp. 55–73.CrossRefGoogle Scholar
[22]Thakor, Anjan V., and Gorman, Raymond F.. “Imperfect Information, Moral Hazard and Optimal External Financing.” Working paper, Graduate School of Business, Indiana University (06 1982).Google Scholar