Privately optimal contracts and suboptimal outcomes in a model of agency costs
AbstractThis paper derives the privately optimal lending contract in the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The privately optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. Although privately optimal, this contract is not welfare maximizing as it leads to a sub-optimally high price of capital. The welfare cost of the privately optimal contract (when compared to the planner outcome) is significant. A menu of time-varying taxes and subsidies can decentralize the planner’s allocations.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1239.
Date of creation: 2013
Date of revision:
Other versions of this item:
- Charles T. Carlstrom & Timothy S. Fuerst & Matthius Paustian, 2012. "Privately optimal contracts and suboptimal outcomes in a model of agency costs," Working Paper 1204, Federal Reserve Bank of Cleveland.
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