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A General Equilibrium Analysis of the Credit Market

Author

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  • Kaniska Dam

    () (Division of Economics, CIDE)

Abstract

I analyse a model of incentive contracts where principals who each possesses the same monitoring technologies, contract with agents from a pool of individuals differing in their wealth endowments. Principals and agents are matched to form partnerships, and the matches are subject to a double-sided moral hazard problems. Agents need to borrow from the principals to finance their projects. In equilibrium, the payoffs to the principals and agents are determined endogenously. The wealthier agents consume higher payoffs, whereas all principals get the same payoff. I further analyse the effects of changes in the monitoring cost and the risk-free interest rate on the optimal monitoring and stock prices.

Suggested Citation

  • Kaniska Dam, 2009. "A General Equilibrium Analysis of the Credit Market," Working papers DTE 461, CIDE, División de Economía.
  • Handle: RePEc:emc:wpaper:dte461
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    File URL: http://cide.edu/repec/economia/pdf/DTE461.pdf
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    References listed on IDEAS

    as
    1. Chakraborty, Archishman & Citanna, Alessandro, 2005. "Occupational choice, incentives and wealth distribution," Journal of Economic Theory, Elsevier, vol. 122(2), pages 206-224, June.
    2. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760.
    3. Timothy Besley & Maitreesh Ghatak, 2005. "Competition and Incentives with Motivated Agents," American Economic Review, American Economic Association, vol. 95(3), pages 616-636, June.
    4. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    5. Repullo, Rafael & Suarez, Javier, 2000. "Entrepreneurial moral hazard and bank monitoring: A model of the credit channel," European Economic Review, Elsevier, vol. 44(10), pages 1931-1950, December.
    6. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 213-232.
    7. Dam Kaniska & Perez-Castrillo David, 2006. "The Principal-Agent Matching Market," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-34, August.
    8. Cantala, David, 2004. "Restabilizing matching markets at senior level," Games and Economic Behavior, Elsevier, vol. 48(1), pages 1-17, July.
    9. Demange, Gabrielle & Gale, David & Sotomayor, Marilda, 1986. "Multi-Item Auctions," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 863-872, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    General Equilibrium; Credit Market; incentive contracts;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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