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Contract Design for Problem Asset Disposition

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Author Info
Larry Benveniste
Dennis R. Capozza
Roger Kormendi
William Wilhelm

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Abstract

As a result of declining real estate values and the receivership of numerous financial institutions, government regulators like the Resolution Trust Corporation (RTC) and Federal Deposit Insurance Corporation (FDIC) have large inventories of distressed assets. This paper develops a model of the principal/agent issues associated with management and disposition of problem assets. In the model, optimal contracts balance risk sharing with incentives for effort. We argue that the RTC will minimize the ultimate cost of the thrift crisis by placing managerial control of distressed assets in the private sector, while retaining full or partial ownership of the assets for risk-sharing purposes. Recoveries are maximized, however, only when an asset manager is incented to expend a first-best level of effort by indexing asset management and disposition contracts to market movements. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00630
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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 22 (1994)
Issue (Month): 1 ()
Pages: 149-167
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:bla:reesec:v:22:y:1994:i:1:p:149-167

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1080-8620

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  1. Mark M. Spiegel, 2001. "The disposition of failed bank assets: put guarantees or loss-sharing arrangements?," Working Papers in Applied Economic Theory 2001-12, Federal Reserve Bank of San Francisco. [Downloadable!]
  2. Tracy R. Lewis & David E. M. Sappington, 2000. "Motivating Wealth-Constrained Actors," American Economic Review, American Economic Association, vol. 90(4), pages 944-960, September. [Downloadable!] (restricted)
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This page was last updated on 2009-11-22.

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