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Lender and Borrower as Principal and Agent

This paper provides a critical survey of some recent developments in the principal-agent approach to the relationship between lenders and borrowers. The costly state verification model of optimal debt contract is introduced and new results with respect to optimality of standard debt contracts in this model are discussed. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the problems with collateral as a screening instrument are outlined. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.

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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2006/24.

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Length: 15 pages
Date of creation: Jul 2006
Date of revision: Jul 2006
Handle: RePEc:fau:wpaper:wp2006_24
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  1. Cyril Monnet & Erwan Quintin, 2005. "Optimal contracts in a dynamic costly state verification model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 867-885, November.
  2. Jiří Hlaváček & Michal Hlaváček, 2006. ""Principal - Agent" Problem in the Context of the Economic Survival," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2006(3), pages 18-33.
  3. Karel Janda, 2006. "Optimal Deterministic Debt Contracts," Working Papers IES 2006/25, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2006.
  4. Hellwig, Martin, 1998. "Financial Intermediation with Risk Aversion," Sonderforschungsbereich 504 Publications 98-39, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  5. Marta Coelho & David de Meza & Diane J. Reyniers, 2004. "Irrational exuberance, entrepreneurial finance and public policy," LSE Research Online Documents on Economics 17279, London School of Economics and Political Science, LSE Library.
  6. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers.
  7. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  8. Klapper, Leora, 2001. "The uniqueness of short-term collateralization," Policy Research Working Paper Series 2544, The World Bank.
  9. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
  10. Karel Janda, 2002. "Model konkurenčního úvěrového trhu v podmínkách nedokonalých informací
    [A model of a competitive credit market in the conditions of imperfect information]
    ," Politická ekonomie, University of Economics, Prague, vol. 2002(4).
  11. C. Benassi & A. E. Scorcu, 2002. "Indexation Rules, Risk Aversion, and Imperfect Information," Working Papers 450, Dipartimento Scienze Economiche, Universita' di Bologna.
  12. Erik Hoelzl & Aldo Rustichini, 2005. "Overconfident: Do You Put Your Money On It?," Economic Journal, Royal Economic Society, vol. 115(503), pages 305-318, 04.
  13. Landier, Augustin & Thesmar, David, 2003. "Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence," CEPR Discussion Papers 3971, C.E.P.R. Discussion Papers.
  14. János Kornai & Eric Maskin & Gérard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
  15. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
  16. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
  17. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
  18. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  19. Karel Janda, 2000. "Monopolistic credit market in the conditions of imperfect information," Prague Economic Papers, University of Economics, Prague, vol. 2000(3).
  20. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
  21. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  22. Machauer, Achim & Weber, Martin, 1998. "Bank behavior based on internal credit ratings of borrowers," CFS Working Paper Series 1998/08, Center for Financial Studies (CFS).
  23. Marek Kapička, 2000. "Jaké jsou náklady a výnosy privatizace?
    [What are the costs and benefits of privatization?]
    ," Politická ekonomie, University of Economics, Prague, vol. 2000(2).
  24. Karel Janda, 2003. "Credit guarantees in a credit market with adverse selection," Prague Economic Papers, University of Economics, Prague, vol. 2003(4).
  25. Manove, M. & Padilla, A.J. & Pagano, M., 1998. "Collateral vs. Project Screening: a Model of Lazy Banks," Papers 9807, Centro de Estudios Monetarios Y Financieros-.
  26. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  27. Ondøej Knot & Ondøej Vychodil, 2005. "What Drives the Optimal Bankruptcy Law Design? (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(3-4), pages 110-123, March.
  28. Rui Zhao, 2001. "Repeated Two-Sided Moral Hazard," Discussion Papers 01-07, University at Albany, SUNY, Department of Economics.
  29. Karel Janda, 2004. "Bankruptcy Procedures with Ex Post Moral Hazard," Working Papers IES 61, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  30. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  31. Timothy Curry & Joseph Blalock & Rebel Cole, 1991. "Recoveries on Distressed Real Estate and The Relative Efficiency of Public versus Private Management," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(4), pages 495-515.
  32. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
  33. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
  34. Robert Cressy & Otto Toivanen, 2001. "Is there adverse selection in the credit market?," Venture Capital, Taylor & Francis Journals, vol. 3(3), pages 215-238, July.
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