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Optimal contract under asymmetric information: the role of options on futures

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  • Andrea Beccarini
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    Abstract

    The aim of this paper is to show that an option on an appropriate future may solve some market failures caused by asymmetric information. Some models related to the adverse selection, moral hazard and verification costs are analyzed and the performance of these options on futures is evaluated. The typical situation regards a consumer (or an investor) who wishes to discount his/her future income in order to finance his/her present consumption (investment); under asymmetric information this agent may incur in liquidity constraints (credit rationing), which is not the case when buying the option on a futures contract. This contract is constructed so that the (future) agent’s income is correlated with some futures contract (but this is private information) on which the option is issued. Some examples show that this is not a very stringent assumption.

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    File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_18_2011.pdf
    File Function: Version of February, 2011
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    Bibliographic Info

    Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 1911.

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    Length: 24 pages
    Date of creation: Feb 2011
    Date of revision:
    Handle: RePEc:cqe:wpaper:1911

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    Keywords: Asymmetric information; credit rationing; options on futures;

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